Three Ways OPEC Decision Will Impact Oil Markets

The oil production decision at the OPEC meeting on Friday, June 22, is interesting on several counts.  First, it is much more than an OPEC meeting, given the lobbying by the United States, and direct negotiations between Saudi Arabia and non-OPEC member, Russia.

Effectively, we now have the top three oil producers in the world — the United States, Russia and Saudi Arabia — diplomatically negotiating global oil production prior to the OPEC meeting, or we should say prior to the meeting between Saudi Arabia and the rest of OPEC.

The actual OPEC oil production decision depends mostly on what Saudi Arabia and Russia decide to do, despite possible protests from Iran.  The production decision will impact markets in at least three dimensions.  It is all relative to expectations, but the general dimensions are as follows:

1)  Price.   The more oil that is produced, the lower the price and vice versa.

2)  Brent vs WTI Spread. The more oil that is produced, the narrower the Brent-WTI Spread and vice versa.

3)  Backwardation.  The more oil that is produced, there will be less backwardation, as near-term prices may fall more than prices further out on the oil futures maturity curve and vice versa.

What are the possible outcomes of the OPEC meeting? For that, CME Group has developed the OPEC Watch tool. The tool develops probabilities for the upcoming meeting based on WTI crude oil option prices, from the closet expiration month that expires after the OPEC meeting.

 

Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact. Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He has authored five books on international finance.

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