Oil prices have been volatile lately flipping between hope and despair regarding a likely output curb/freeze deal at the formal OPEC meeting in Vienna on November 30. Though Iraq and Iran were reluctant to cut oil output initially, Iraq finally gave its approval (read: Inverse Oil ETFs in Focus as Iraq Threatens OPEC Deal).
Investors should note that this is the third time this year that the investing world is looking forward to this deal as oil price has been reeling under acute pressure for long. In the past, such attempts were made in Doha in April and in Algeria in September (read: 3 Country ETFs Soaring on Hopes of Oil Output Curb).
But all hopes went down the drain as the OPEC top-brass Saudi disagreed to the deal mainly citing Iran’s lack of participation. In fact, Iran has been boosting production since international sanctions on it were lifted in January. This is because Iran was producing below its capacity and pre-sanctions levels since 2011 while the other countries raised their output limit to record levels.
However, in September-end, OPEC indicated that it will cut production to 32.5 million to 33 million barrels a day in the November meeting. OPEC’s estimated output in October was 33.6 million barrels a day. This implies that a 900,000 barrel cut would take OPEC output to the mid of that reduced range, as per Bloomberg.
Arguments in Favor of the Deal
In the current scenario, a $1 rise in oil price would push up Iraq’s revenues by $1 billion a year. So, with Iraq giving the green signal, the question now moves to Iran. At the September meeting in Algeria, Iran expressed intentions to reach its pre-sanction levels of over 4 million. With that production level now reached, Iran should not be a significant barrier to the agreement.
Apart from this, there are several market watchers who see OPEC creeping toward an output curb deal at the end of the month to put an end to the two-and-half year long suffering in the oil patch. Among the non-OPEC members, Russia wants to a freeze (not reduce) in its output and would like to see the OPEC deal materializing in the near future. Head of commodity research at Citigroup expects the deal to see the light of day.
Arguments Against the Deal
That being said, we would like to note that there are analysts who believe that Iranian oil output and exports may be hurt with the U.S. president-elect Trump having pledged to “tear up” the nuclear agreement with Iran at the time of his campaign. So, previewing this fate, Iran might not agree to the output cut deal.
Moreover, Saudi Arabia stayed away from prearranged talks with non-OPEC nations including Russia on November 28 due to rising differences on the allocation of share of supply cut. The meeting has in fact been called off now. In its place, the OPEC arranged another internal meeting to sort out its’ own issues. As a result, United States Brent Oil (BNO - Free Report) dropped over 2.9% on November 25 while United States Oil (USO - Free Report) plunged about 3.2% on November 25.
Time to Buy Oil ETFs Even if OPEC Doesn’t Cut?
Goldman Sachs believes so. Even if the OPEC doesn’t agree to clinch a deal, Goldman anticipates a deficit in the second half of next year. So, according to the bank, an output cut deal would weigh on OPEC for a maximum of six months because OPEC can arrive at its regular production level by the second half of next year.
But investors should note that if OPEC manages to cut a deal and boost oil prices, U.S. shale oil production will likely gain traction. This in turn can bring back the oversupply into the market again and weigh on oil prices. So, like several other analysts, even we believe that an OPEC deal would lead to a spike in oil prices in the near term. Things are however pretty unclear for the long term. Only rising demand can save oil from this uncertainty (read: ETFs to Watch as IEA Forecasts Weaker Global Oil Demand).
If this was not enough, a rising greenback in the wake of a likely Fed rate hike next month and ‘Trumponomics’ may hurt overall commodity investing including oil.
Projection of Near-Term Oil Price
Presently, crude is hovering around $45 a barrel. As per an article published on The Wall Street Journal, an well-articulated deal may shoot up the price to a $55 a barrel level while drag it down to the $40 mark if OPEC disappoints again. However, there are analysts who expect a big rally in oil prices even if OPEC reaches an agreement.
What Should Be Your Take on Oil ETFs?
Overall, sentiments are mixed and oil is expected to move sideways till the meeting. While products like USO and BNO give investors exposure to a bullish play on oil, they can play any dip in oil prices with inverse oil ETFs like ProShares Short Oil & Gas ETF ((DDG - Free Report) ), ProShares UltraShort Bloomberg Crude Oil ETF((SCO - Free Report) ) and DB Crude Oil Double Short ETN ((DTO - Free Report) ). Direxion Daily Energy Bear 1X Shares ETF ((ERYY - Free Report) ) can also come to investors’ rescue in an oil price slump (read: Oil to Stay "Lower for Longer"? Short Oil & Energy ETFs).
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