Gauging the Potential Outcomes of the Upcoming OPEC+ Meeting

One of the, if not the, most important events in the oil market is the regular OPEC meetings, where member countries, now together with their 10 non-OPEC peers, decide their level of output going forward. Its significance lies in the fact that the alliance fulfils the role of the swing producer in the global oil market. In case demand exceeds supply, the group’s output level is expected to rise in its attempt to balance the market and vice versa. This prominent role is conspicuously exhibited on the above chart. At the height of the coronavirus crisis, demand was destroyed, and OPEC rushed to decrease production to prevent global oil inventories from overflowing. The ensuing two years saw the unwinding of these cuts as some kind of equilibrium was attained.

Of course, OPEC’s swing producer role is carefully aligned with the interest of member countries. Reduced production, which was implemented last August, seemed to have achieved the desired goal by June this year, yet depressed production quotas were rolled over during the last OPEC meeting despite depleting inventories and rising prices. According to the official OPEC narrative unchanged production levels aim to support the stability of the oil market.

Whatever the rights and wrongs of the decisions of the producer cartel, those who prognosticate the outcome of the OPEC meetings accurately have the comparative advantage over the rest of the market participants. A tool designed by CME Group, called OPEC Watch provides invaluable help in assessing the anticipated result of OPEC meetings. It is an unbiased method as it exclusively relies on developments in the energy futures market, namely WTI options. Using traded WTI option prices, the probability of three possible outcomes is calculated on an ongoing basis. Presently these categories are “Increase Output,” “Maintain Output Cuts,” and “Further Output Cuts.” Before the last Ministerial Meeting on June 4, the tool correctly predicted that the most likely outcome would be “Maintain Output Cuts.” Its probability fluctuated between 66% and 72%. The next meeting is planned for November 26. Assessment of the probability of the outcome will start 21 days prior to the meeting, i.e., November 6. Following the OPEC Watch Tool will be imperative to gauge market sentiment.

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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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