Oil in Global Economy Series: Markets’ working assumption and downside scenarios for OPEC meeting tomorrow

Tomorrow OPEC ministers are set to meet at their Vienna headquarter in order to decide the fate of the current OPEC deal that is aimed at removing as much as 1.76 million barrels of crude oil from the market. Here, we are going to discuss possible upside scenarios and the financial market’s working assumption. WTI is currently trading at $51.8 per barrels and Brent at $2.8 per barrel premium.

• As of now, a nine-month extension of the deal till March 2018, is the working assumption of the market based on comments from Saudi Arabian and Russian oil minister who along with their Iraqi counterpart has agreed to the timeline. This assumption has the highest probability and does not see a change in any other components such as additional cuts.
   
• A downside scenario would be where OPEC members agree to extend the current deal not for nine months but six months. This was the working assumption only weeks ago until the Russian oil minister Alexander Novak and the Saudi oil minister Khalid al-Falih said that the two biggest oil producing countries have agreed to extend the deal for nine months. While this outcome is positive for the oil price, the current working assumption of nine months makes this case a bearish one. The financial markets would immediately assume resistance within the OPEC to a longer extension and oil price would suffer to the downside.
   
• The worst case scenario would be where OPEC members fail to attain any deal. While the probability of such an outcome is very low, this case would see a rapid deterioration in the oil price, especially when Russia, Saudi Arabia, and Iraq have said that they agreed to nine months. This could see WTI decline below $40 per barrel within a short span.