What’s happening in oil?

Crude prices have seen a reasonable bounce in the last few days with US light sweet crude increasing by just over $3.00, while Brent prices are back testing $80.00 a barrel.

Source: Bloomberg

The highly anticipated OPEC meeting on November 27 is clearly the big driver for prices in the short-term and there seems to be a growing view that production is likely to be cut. This view has really stemmed from the Libyans, who have suggested cutting OPEC’s production target by 500,000 barrels a day. Given OPEC’s current production is currently running at 30.97 million barrels a day, a cut of 500,000 barrels would still in theory see production running above the organisation’s current target of 30 million barrels a day.

It’s worth bearing in mind then that, with the exception of a couple of very short periods, actual production has been running above the group’s production target since 2011.

Iran, Venezuela, Ecuador, and Algeria seem to be backing the production cut and, if we add Libya into the mix, these nations contribute around 22% of total OPEC production. Saudi Arabia and Iraq are the key countries, though, contributing 31.5% and 10.7% respectively. As far as I can see, they haven’t shown any interest in altering production quotas as yet.

We have also seen some buying of crude on the back of slightly improved US data, with the Philli Fed manufacturing printing the highest levels since December 1993. It’s worth remembering that this data series is possibly the most volatile anywhere, but the internals of this survey point to some very positive trends. US leading indicators also beat expectations, gaining 0.9% in October.

US gasoline prices are currently averaging $2.85 a gallon at the pumps, the lowest levels since November 2010. With this in mind, it’s worth highlighting the fact the IMF recently stated every $10 fall in crude prices positively impacts global growth by 0.2%. So, given brent prices have fallen around 30% from the year’s high, in theory this should have helped global growth by 0.7% or so.

Looking at the options market, implied volatility is currently at 32% (for the front month contract) – the highest levels since July 2012. This highlights indecision from traders and a belief that the near-term direction will be volatile and uncertain. Still it seems there is a growing view that a number of OPEC countries are trying to cut production in the upcoming meeting. This seems to be having a stabilising effect on prices.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.