The meeting of the Organization of the Petroleum Exporting Countries and its allies in early July is coming at a particularly important and volatile time for oil. Prices have been supported by major producers’ output cuts, growing tensions in the Middle East, but also pressured by forecasts of a slowdown in global demand.
“The OPEC meeting is critical, as an extension of OPEC cuts is essential to stabilize the market,” says Jay Hatfield, CEO and portfolio manager at InfraCap, a firm with investments in oil.
Front-month futures for U.S. benchmark West Texas Intermediate CLQ19, +0.30% settled at $57.43 a barrel on Friday. They’ve risen nearly 27% this year, although they’re 13% below the 2019 high of more than $66, seen in April, according to Dow Jones Market Data. Similarly, global benchmark Brent crude BRNQ19, +0.23% at $65.20, has climbed 21% in 2019, but is nearly 13% below its $74-plus high for the year.
WTI jumped by more than 5% Thursday, after Iran shot down a U.S. drone, raising tensions, and almost triggering U.S. airstrikes. They already were high following attacks on two tankers near the Strait of Hormuz, which the U.S. blames on Iran. The situation threatens to curb the global flow of oil.
The rise in oil’s price follows a steep decline in May, which James Hatzigiannis, a senior commodities associate at Long Leaf Trading Group, attributes to “the ongoing trade relations worsening between [the] U.S. and China.” The trade dispute raises concern about weakness in the global economy and energy consumption. The International Energy Agency recently trimmed its 2019 growth forecast for oil to 1.2 million barrels a day, from a previous 1.3 million. “The fear of [weaker] global demand for crude offsets the tensions in the Middle East,” says Hatzigiannis. Until the trade dispute is “resolved, or there is more progress, I do not see WTI moving higher than $60.”
But Hatfield argues that cheaper crude might “stimulate demand, particularly in the U.S., as we move into the heart of the summer driving season, with gasoline prices almost 15% below last summer’s levels.” He says West Texas Intermediate could rise to the $60 range by summer’s end.
The dates of the separate OPEC ministerial meeting and of OPEC and its allies, known as OPEC+, have been changed to July 1-2, from June 25-26. The “main component in delaying the meeting is a wait-and-see approach. They want to see the outcome of the G-20 summit, and they hope Trump and [China President] Xi at least make some progress on a trade deal,” says Hatzigiannis.
The results of the G-20 meeting and talks between the presidents should help OPEC members and nonmembers, including Russia, decide on whether to continue the deal to reduce production by 1.2 million barrels a day. That plan began at the start of the year, and expires on June 30. “We and most investors expect OPEC to extend” the cuts, says Hatfield. “Unless there is a surprise outcome of additional cuts or no agreement to extend, the market impact should be muted.” However, there’s a “small chance of an incremental production cut that would drive oil prices up significantly.”
If the pact isn’t extended, oil prices should drop, Hatzigiannis says, emphasizing that an end to the production curbs is very unlikely. However, if by “some miracle” the U.S. and China agree to a trade deal before OPEC meets, “it would decrease the likelihood of a production cut from OPEC.” Under that scenario, both demand and prices might climb.