FxWirePro: Spotlight on OPEC and Non-OPEC factors - Hedge Brent/WTI crude prices ahead of OPEC meeting

Today’s the most eye-catchy economic event is debatably the OPEC meeting. Reports from the preliminary meetings suggest that an increase in production should be seen, although this could still be blocked.

The US, China, and India have recently put pressure on their suppliers to increase supply and ease the pressure from the rapid rise in oil prices (Brent oil recently traded above $80/bbl).

Talk has been for a 1mln-1.5mln bpd increase, but it is more likely that the final number maybe near 600k and that’s if the decision doesn’t get blocked.

Oil fundamentals are expected to weaken in 2019 on the back of stronger than expected non-OPEC supply but also the potential release of barrels from OPEC as the joint accord between OPEC and non-OPEC is unlikely to stay in place given the changes in OPEC dynamics lately.

Non-OPEC supply is expected to rise sharply in 2019 led by US shale growth along with Russia, Brazil, Canada, and Kazakhstan.

While geopolitical tensions and lingering risks of large supply disruptions remain an upside risk throughout 2H’18, we reckon that prices would be corrected downwards towards the end of the year and remain capped in 2019.

Heavy producer flows in May have also pushed the 19/20 vol curve into steep backwardation. Activate a short Brent Jun19 70 strike (~30D) put vs. long Jun20 ATMF straddle Vega-neutral calendar spread to jointly fade skew richness and curve inversion. Courtesy: JPM

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