Crude Oil: Forget Next Sunday, Move On To June

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Nikhil Gupta

Summary

The oil freeze meeting between OPEC and non-OPEC members will take place on April 17.

Oil can move 10 percent in either direction before the outcome of the Doha meeting.

I believe the OPEC meeting on June 2 holds much more importance.

OPEC and non-OPEC nations will meet in Doha next Sunday, April 17th to discuss the proposed oil freeze arrangement in order to stabilize the oil market. First proposed in mid-February, the possibility of a coordinated, simultaneous freeze on production levels has excited the market, sending crude oil up more than 30 percent since the announcement.

On Friday, April 8, crude oil futures ended the session 6.6 percent higher, completely erasing the previous week's loss.

Source

Due to the high number of variables, it has become extremely difficult to call what the next move in the market will be. I am expecting crude to move 10 percent in either direction before the outcome of the Doha meeting.

But this is not where our attention should be. The production freeze arrangement, even if it comes into place, will unlikely be a major factor in the oil market. Even if the nations succeed in elevating the prices with their phony arrangements, downward pressure will be felt again as oil drillers jump at the first opportunity to recoup the hefty losses by accelerating pumping.

The 169th OPEC meeting on June 2, 2016 in Vienna could actually be the driving point for oil. A lot of analysts and energy firms are banking on higher prices in H2. The traders, as can be seen from the futures data below, are also positioning themselves for the June event.

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As of 8th April, the open interest for the month of June increased by 54,287 against a negative change of 58,763 for the month of May.

Something that the market is not respecting is the bad weather condition in Iraq, which has held up roughly 43 million barrels of oil at the port of Basra. As production continues in Iraq, the big queue of tankers holding crude at the port will lengthen. The weather conditions will stretch the shipment delays till the end of April or mid-May.

Another important discussion that will take place in the June meeting is that the non-OPEC crude oil supply is expected to jump in the fourth quarter of 2016.

OPEC's Monthly Oil Market Report for March revealed that oil supply in Q4 will increase for almost all the major OECD nations after a small decline in Q2 and Q3.

The market will also be closely watching how OPEC nations, especially Saudi Arabia, propose to deal with this coming supply rise as they have vowed to protect their market share at all costs.

Here it may be argued that the world oil demand is also expected to grow by 1.25 million barrels per day in 2016, compared to 2015 which will offset the supply rise. However, the demand estimate is contingent on the fact that oil prices remain subdued. If the prices advance substantially, the demand will fade.

But as I said earlier, there are too many variables in the oil market, which can prove me very wrong. I may be drifting towards the bearish side, and so, there is this huge possibility that I am unable to appreciate the positives. Therefore, finish your due diligence before making any trade or other investing decision.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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