Can speculation for OPEC supply cuts rescue oil prices from the doldrums?

Oil prices collapsed in recent weeks, as the US waivers on Iranian sanctions coupled with soaring US production revived concerns
 that the market may be shifting towards oversupply. That said, there may be a bright spot on the horizon for the bulls, as OPEC is flirting with the prospect of cutting its output to support prices again. Regardless of whether the cartel ultimately does so or not, speculation for another cut may help keep a floor under prices ahead of the next OPEC meeting, on December 6.

The past five weeks have been a particularly interesting period for the oil market. October began with crude prices touching their highest levels in four years, on concerns that Iranian exports were set to drop massively in light of US sanctions. That didn’t last though, and WTI prices came crashing down to fresh 7-month lows by early November, following news that the US had granted sanctions waivers to eight countries, allowing them to continue to import Iranian oil for another six months. The risk-off atmosphere that dominated recently didn’t do crude any favors either, as it likely curbed demand for commodities in general, which are perceived to be relatively risky assets.

The liquid’s losses have been particularly steep because the Iranian sanction waivers came at a time when US production continues to soar to fresh all-time highs, while Saudi Arabia and Libya raised their own production as well, reviving concerns that crude markets may be shifting into oversupply again. For perspective, the US produced 11.3 million barrels per day (bpd) in August, marking an increase of 400k from the 10.9 million bpd in July, and overtaking Russia as the biggest producer globally. This sudden jump likely led investors to reevaluate how quickly they expect US supply to rise going forward, evident by a simultaneous decline in spot prices and futures contracts for oil. The demand side has not been any brighter, with global growth slowing, and trade tensions adding yet another dimension to downside risks.

Looking ahead though, it might not be all doom and gloom for oil prices, as the OPEC and non-OPEC alliance may come to the rescue once more. The cartel and its allies, most notably Russia, are reportedly considering whether to start cutting production again in 2019, against the backdrop of rising inventories and falling prices. While this is far from certain at this point, as the producers may finally decide that Iranian sanctions will ultimately remove enough barrels to avoid the need to cut back their production, speculation around this prospect could still keep a floor under oil prices as we approach the OPEC meeting on December 6.

In other words, although OPEC and partners may not do anything in the end, so long as they seriously discuss the option of reducing supply, that could still support prices a little heading into the gathering. Particularly since most of the “bad news” seem to be priced in by now, with futures contracts increasingly pointing to even lower prices moving forward.

Technically, further declines in WTI could encounter support near the $60.00 handle, defined by the March lows, and which may hold some psychological importance. A downside break could set the stage for a test of the February 9 trough at $58.10, before the focus shifts to $56.10 – this being the December 14, 2017 low.

On the flipside, advances in the liquid may stall initially near $61.80, an area defined by the April nadir. If the bulls manage to pierce above it, then the June low of $63.60 would attract attention, ahead of the August trough at $64.45.