OPEC: Risk/reward favours positioning for disappointment this week - Nomura

Broadly speaking, the oil price move higher has been fundamentally driven, with the demand/supply imbalances improving in recent months, according to analysts at Nomura.

Key Quotes

“Strong global growth momentum and renewed capex expenditure means demand is robust, while supply has been curtailed by the ongoing production cuts and inventory drawdowns. But in the short term, we see scope for some reversal in oil prices. Even at the May meeting (when cuts were extended), oil prices declined significantly after the event.” 

“Oil positioning has a tendency to rise into OPEC meetings but decline thereafter. With net-long oil positioning having risen to its highest level since before the price slump in 2014, a positioning unwind after next week’s OPCE meeting may occur again, putting some pressure on oil prices. Indeed, based on the elevated market positioning, and “backwardation” in the frontmonth oil futures contracts (the first time this has happened since November 2014), we judge this is where the vulnerability resides and it underscores our view that the OPEC meeting poses asymmetric risks.”

“The fundamental forces still coming through should act as a cushion and point to a higher oil price range being sustainable, but in the short term, given this mix and bullish sentiment, a delay in any announcement of an extension of the production cut is likely to generate a greater negative short-term reaction in oil prices.”