Moment of truth for OPEC as Iran, Iraq remain key obstacles

Everybody wants a deal, but not everyone is willing to participate in making one. This is how it currently feels with just 24 hours before ministers from OPEC meet to reveal their strategy for ending a 3-year global supply glut.

Iran and Iraq remain to be the major obstacle to any meaningful production cut, and Saudi’s energy minister comments on Sunday that the market would balance itself in 2017 even if producers did not intervene brings more pessimism and doubts than hopefulness over the long-term outlook.

Although it might be true that markets will rebalance in 2017 whether a production cut is reached or not, oil bears are just waiting for a signal to push the sell button, and 15% decline towards $40 looks very reasonable incase no significant deal was reached. However, markets still believe that a production cut of 500,000 to 1 million barrel per day is achievable tomorrow and this explains Monday’s price action where both major benchmarks rose by more than 2%.

A meaningful deal is required more than ever as GCC economies fiscal deficits continues to widen and lower public spending is weighing heavily on growth, but given the political differences between OPEC members there’s a high chance we’ll end up with only a face saver deal.

Traders should be prepared for a volatile session ahead with many headlines to hit the wires in the next 24 hours and this volatility will spread beyond oil to equities and fixed income markets.

The dollar rally coming to an end?

Profit taking and mild declines in U.S. treasury yields pulled back the U.S. dollar slightly from its 13-year highs. Most of the sell-off was seen against the Japanese Yen which recovered almost 1.5% from its lowest levels since February. Monday brought the question on whether the rally on the U.S. dollar was over, or it’s only a slight correction before it resumes the uptrend?

To answer this question, we need to know what is the Fed thinking of. Will they raise rates in December and wait longer for a second hike? Or a series of hikes will be projected for 2017? A couple of Fed presidents are scheduled to speak this week, and if they indicate that tighter monetary policy is needed in 2017 the dollar rally will likely resume, if no guidance is given then traders should rely on economic data, specifically Friday’s non-farms payroll. However, any declines in U.S. dollar are likely to be minor especially against the Euro and the Pound given that many political tensions are likely to hit the Euro Area in the next couple of weeks.