OPEC will attempt to manage perceptions in both the physical and financial markets—but given its track record, it will not likely produce stability and certainty, but instead ambiguity and volatility.
The direction of hedge funds bets in the coming weeks and months will depend on a number of factors, including the U.S. rig count, the strength of the dollar, the Fed’s decision on whether to raise interest rates, and of course OPEC.
OPEC has changed not only fundamental dynamics of the oil market, but the entire narrative: There’s very little, if any, talk about “lower for longer”—the issues currently rattling the market are not going away any time soon.
More and more market watchers are making the case that OPEC should just leave well enough alone and let the free market set the price. While trying to influence sentiment and fundamentals, on nearly a daily basis, OPEC has already destabilized the market and guarantees more uncertainty ahead.
Markets are shrugging off OPEC headlines, with prices weakening and hedge funds liquidating long positions. The cartel may be missing the mark on its stated longer-term goal of stabilizing the market and preventing a catastrophic correction.
Despite constant chatter of rebalancing, oil prices have been weakening, and OPEC has itself to blame for causing market uncertainty and instability.
A large stock build in the first quarter, rampant producer hedging, and large amount of investor inflows in the futures market created an “unbalancing of the market,” the opposite of OPEC’s stated goal, according to one prominent oil market analyst.
The biggest questions at CERAWeek this year is whether OPEC and its non-OPEC counterparts will recommit to throttling back in May and whether U.S. shale can fully offset these cuts and push down prices.
OPEC has certainly put a floor under the market, but it’s not yet clear how high members can push prices. Oil may simply trade in a range of $45-$60, with shale capping prices on the upside and the cartel's production cuts limiting the downside.
When prices were high, OPEC members benefited from any speculative-driven rally. Now, however, the tables have turned—OPEC members, already suffering from low prices, are jittery that speculators will sell the market down again toward previous lows.