It's all about expectations, and the word is ..... don't expect too much.

Monday 11th April 2016

  

It's all about expectations, and the word is ..... don't expect too much.

ref :- "Will OPEC deliver oil deal in Doha?" , Holly Ellyat , CNBC online

Would it be fair to assume that we're all pretty well-versed by now in the reasons why the price of oil is such a big deal ? Its close correlation to equity prices .... its role in inflation calculations and therefore by extention monetary policies, bond yields etc ..... its contribution to the fortunes of emerging markets and their currencies ..... etc, etc, etc. In short, just about every major asset class is affected to greater or lesser degree by the cost of a barrel of oil.

Last week saw a rally of nearly 7%, a continuation of the larger upside move that has seen benchmark Brent crude rally from its low of below $28 per barrel to above $42  as we write. That's a 50% move from those lowest levels, so fundamentally what's changed ? In terms of supply and demand and inventory levels etc , "not much" is the answer. But it's more about what might change than what has already done so, and in recent weeks the jawboning of various oil producers has been enough to squeeze nervous holders of speculative short positions into a rush for cover.

The latest leg up can be ascribed squarely down to speculation that the meeting in Doha this coming weekend between about 15 OPEC and non-OPEC producers will see them cobble together an agreement to freeze output at current levels. You could be forgiven for wondering just how keeping production going at the same rate that has brought about the current oversupply conditions is going address that fundamental imbalance. The hope (amongst producer nations) is that a deal, any deal, will put a floor under the market and would bode well for further cooperation until demand picks up later in the year. That of course makes quite a few assumptions but nevertheless has been strongly market-supportive. The trouble is that there is no guarantee that any deal can be reached.

The Saudis have said they would limit production at current levels provided others , including Iran, did the same. Iran said it approves of others freezing output levels (as well they might) but wouldn't conceive of doing so themselves until their output had climbed back to its pre-sanctions level of over 4m bpd.  The Saudis responded that they would not participate in any such deal unless Iran did the same. Kuwait has said that there could be a way to allow for increased Iranian production and to keep overall output unchanged. That would require somebody taking a haircut to make room for Iran and in view of the intense rivalries between the two of them it seems highly unlikely that it would be Saudi, and after all they are the biggest player of all in this game.

In short, despite all the bullish rhetoric and the short-covering it has prompted, prospects for a deal seem remote ..... at least that's the view of some of the heaviest hitters : Goldman Sachs, JP Morgan, Credit Suisse. As things stand at the moment however prices are on the charge again after the briefest of breathers this morning. The fact that the market is keener to focus on a fall in US production rather than a rise in that of Iraq tells us quite a lot about the prevailing dynamic just now. That means there is likely to be considerable disappointment should the meeting turn out to be a damp squib as that trio suggest it might, and the danger for prices would seem to be on the downside. Of course it's going to be a long week and their view could become commonly held, which would mean no expectations and therefore the danger would be to the upside.

So keep an eye on all things oil this week ..... no doubt the market will be pretty volatile and reactive to any kind of comment. We however might be better off taking everything with a pinch of salt and waiting to see what they manage to put together come the end of the weekend.