OPEC will ‘go beyond’ what the market has currently priced in, strategist says

OPEC could deliver a larger-than-expected production cut at its meeting later this week, according to MUFG Bank.

Oil prices have been under pressure since the outbreak of the coronavirus in January dampened the demand outlook for the year. 

Following the “massive sell-off” in recent weeks, Ehsan Khoman, head of MENA research at MUFG, said his “baseline scenario” is 1.2 million barrels a day of additional production cuts from the second quarter of 2020 until the end of the year.

“We think that OPEC will deliver, we think that they will go out of their way, and they will go beyond what’s currently priced in,” he said. 

“This 1.2 million barrels a day of our baseline case for the next nine months is what’s going to cause the next leg higher in oil prices in the week ahead,” he added.

When asked whether there’s consensus in the alliance for a cut of that magnitude, Khoman acknowledged that the differing oil market strategies of Saudi Arabia and Russia would be a “key sticking point.”

Riyadh generally prefers higher oil prices, while Moscow is comfortable with $50 oil. 

“But we think, in the spirit of keeping the OPEC agreement alive, they will (take) coordinated action when they meet this week in Vienna,” he said.

If OPEC disappoints, however, oil prices are likely to fall further. “Anything below a million (barrels a day), then we could see a leg lower, anything with Brent hovering around the $40 mark,” he said. “That’s really disconcerting.”

Brent crude traded at around $50.63 in Asia’s evening hours, up 1.87%, while U.S. crude futures were trading at $45.48, 1.61% higher. Both are more than 20% down from the beginning of 2020.

But Khoman said OPEC could still jolt the market with a large cut.

Pointing to the group’s meeting in December, he said there was little guidance initially, but the ministers “surprised the markets” on the last day. “We think potentially that could happen this week as well.”