OPEC+ meeting on June 6

Investors await the OPEC+ decision on output cuts. It will define where the oil price will go.

Brief background

The oil market was completely destroyed this year. The coronavirus outbreak forced all the people to stop travelling, driving their cars and factories to shut down. As a result, the oil demand crashed. Moreover, Russia rejected the OPEC’s proposal to cut supply to stabilize oil prices amid the coronavirus crisis. That leaded to some kind of a competition between Russia and Saudi Arabia: “Who will pump more oil?”. The effect was devastating – oil prices fell below 0. Finally, OPEC+ members agreed on output cuts and oil prices bounced back.

What’s happening now?

Firstly, lockdowns eased and the oil demand recovered a little bit. Secondly, oil producers have made significant output cuts. Eventually, oil prices have rebounded, but they are still well below the pre-crisis levels. The main catalyst for the oil prices’ growth will be the OPEC+ meeting tomorrow. Most analysts highly expect its members to continue supply cuts. Also, it’s not only important how much oil barrels they will decide to cut, but also for how long they will extend their agreement.

There are some doubts about the alliance’s decision. Firstly, investors were afraid that Russia may refuse to extend cuts. However, Russia’s Energy Minister Alexander Novak reassured them as he claimed that Russia is open for next cuts. The problem now is the OPEC’s second largest producer, Iraq as it reached only 42% compliance. And, other members won’t be interested to cut supply unless Iraq abides the agreement.

Moreover, the US NFP data was better than analysts expected. It improved the market sentiment and oil prices surged in a wave of a global optimism. That also means, that economies are recovering after the coronavirus damage and the oil demand will soon come back to its previous levels.

Technical outlook           

Let’s look at the Brent oil chart. The price is headed toward the retracement level at $45 near the 50% Fibonacci level. If the Brent price crosses it, it will clear the way towards the key level at $51.5 where the 61.8% Fibonacci level meets the 200-day moving average. Support levels are 39 and 36.

Follow OPEC+ decision tomorrow!