3 Ways OPEC Decision Will Impact Oil Markets

by: CME Group

By Blu Putnam

The oil production decision at the OPEC meeting on Friday, June 22, is interesting on several counts. First, it is much more than an OPEC meeting, given the lobbying by the United States, and direct negotiations between Saudi Arabia and non-OPEC member, Russia.

Effectively, we now have the top three oil producers in the world - the United States, Russia and Saudi Arabia - diplomatically negotiating global oil production prior to the OPEC meeting, or we should say prior to the meeting between Saudi Arabia and the rest of OPEC.

The actual OPEC oil production decision depends mostly on what Saudi Arabia and Russia decide to do, despite possible protests from Iran. The production decision will impact markets in at least three dimensions. It is all relative to expectations, but the general dimensions are as follows:

1) Price. The more oil that is produced, the lower the price and vice versa.

2) Brent vs WTI Spread. The more oil that is produced, the narrower the Brent-WTI Spread and vice versa.

3) Backwardation. The more oil that is produced, there will be less backwardation, as near-term prices may fall more than prices further out on the oil futures maturity curve and vice versa.