Bank of America (NYSE:BAC) has published a report entitled “Reduce risk heading into the Doha meeting” in which the bank details four possible scenarios coming out of the OPEC meeting this Sunday in Doha. The scenarios are back to a price war, no output freeze, a soft output freeze, and a hard output freeze with some enforcement mechanism.
In our view, the last two scenarios would send Brent prices above $50/bbl in relatively short order, while the first two outcomes could lead to a price drop below $40/bbl.
While the bank considers ‘no output freeze’ as its base case, there is a possibility of a return to politics trumping economics, prompting a repeat of the December 2015 meeting – ‘price war’.
In the very near-term, however, a bearish outcome in Qatar is a possible scenario. While we see room for cooperation between OPEC and Russia, we also acknowledge that Doha could end up being a repeat of the December OPEC meeting. In other words, Middle East politics could once again trump oil economics. So should Saudi announce an additional output expansion in response to Iran’s return to market, Brent prices could retrace to the $30-35/bbl range.
Given that the 60% odd rebound in oil prices since January has been driven by the reversal of record short positions on speculation that OPEC will return to managing the market, there is a lot riding on this meeting.
Since OPEC and Russia (the latter in particular) have an atrocious record of keeping to production agreements, it may be the case that only the ‘hard production freeze’ scenario will prevent prices from retracing at least part of the recent gains in the oil price.