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Scenarios for Oil and USD/CAD Traders Heading Into OPEC Meeting

Scenarios for Oil and USD/CAD Traders Heading Into OPEC Meeting

2016-11-30 00:53:00
John Kicklighter, Chief Strategist
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Talking Points:

• US crude oil prices (WTI) dropped 3.9 percent this past session - matching the biggest drops in the past 4 months

• OPEC Oil Ministers are scheduled to meet Wednesday in Vienna with promises from September of clear production cuts

• There has been little consistency in production limits/cuts commitments from countries these past weeks

See the DailyFX Analysts' 4Q forecasts for Crude Oil, the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

There has been far more volatility than direction for oil prices these past weeks as the market weighs its belief/skepticism of OPEC's commitment to correct the supply glut. Now the group is on the hook to live up to or disappoint the market's rampant speculation. Back in September, the group of oil producing nations agreed to putting into place a cap on the output of crude in order to have a meaningful dent on the world's oversupply of the commodity. A severe supply-demand imbalance is the foundation for oil's persistently low prices - particularly the drop through 2014/2015 - and it is not easy to bolster demand through global economic strength.

The recovery in energy prices that we have seen through most of 2016 has come on the foundation of rumor, jawboning and its resultant speculation. Individual oil ministers from various OPEC members have made promises or proclamations about cuts that were ahead, and the market would react. It wasn't until the September meeting and agreement on cuts that there was real reason to believe that change was afoot. The pesky details were saved for the next meeting likely in order to generate better support among members that were still showing limited interest in participating. The time is now upon us for details, and remarks from officials certainly raise the good reason for skepticism that a deal is at hand.

Just this past session, an Iranian representative made it known the country was not considering cutting its output. It may still cap production which would have a material impact for the entire energy market so long as others participate. But, this meeting is as much a situation of game theory amongst members as it is about the economics of supply-demand. The market's focus on this event is extreme, and volatility is highly likely. What's more, the scenarios can be charted rather clearly. No agreement (even with vows of details later) would likely be treated as a reason to dive as the speculative premium bleeds away. An agreement of caps and/or cuts, would be seen as bullish which could finally offer a fundamental backdrop rather than one of conjecture. We discuss this event and how it can drive markets in today's Strategy Video.

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