Investing.com -- OPEC+ heads into its May 5 meeting with oil prices under renewed pressure and member countries divided over whether to accelerate production increases, leaving oil prices poised for swing lower or a short-covering rally depending on the group’s decision, Citi analysts said in a recent note.
“We expect pushbacks from member countries of OPEC+ to the apparent proposed production increase, such that oil prices hang in the balance-a big fall or a sizable short-covering rally?” Citi analysts said in a note this week, highlighting the high-stakes nature of the gathering.
Brent crude briefly fell below $60 a barrel on May 1, nearly revisiting April’s lows after headlines suggested Saudi Arabia could be willing to raise output and let prices slide further. The “news that Saudi Arabia would be willing to raise oil production in the upcoming OPEC meeting and let oil prices fall brought about additional price uncertainty,” the analysts added.
Citi lays out a range of scenarios for the coming months. In the bear case, further weakness in Brent could meet support at $57 in Q2, $50 in Q3, and $45 in Q4 if fundamentals and sentiment worsen. “If OPEC+ delivers an additional production increase, say a further 0.5-mb/d acceleration, then the high-US$50s/bbl range for Brent could hold,” Citi said, though noted that a stronger increase or a breakthrough on sanctions with Iran could push Brent down to around $50.
These levels are consistent with fundamental cost supports, the analysts said, citing the Dallas Fed Energy Survey. “The Dallas Fed Energy Survey suggests that producers in the ‘Permian (Other)’ region…require an average of around US$45/bbl ‘West Texas Intermediate (WTI) oil price…to cover operating expenses for existing wells.’ Adding around US$4/bbl of Brent-WTI spread, then the US$49-50/bbl level could form another support level.”
In the bull case, meanwhile, Citi sees a surprise rally possible if OPEC+ refrains from further increases or if sanctions on Iran tighten, with Brent potentially moving back into the $70s. “Our bull case prices in the US$70s/bbl range entail a combination of no additional production increase above what’s announced, or even a freeze, and some harsher sanction implementation related to Iran as talks have stalled,” the analysts said.
For OPEC, a difficult balancing act lies ahead as fiscal breakeven prices for key producers like Saudi Arabia are much higher than current market levels.
“If OPEC+ still accelerates its production return, then it would be difficult to know where OPEC+ would reconsider its production decision. A potential threshold from recent memory is a return to COVID-era prices around mid-US$40s/bbl, when they made forceful cuts to production,” the analysts said.
With the market “more conditioned to thinking of downside,” Citi warned that volatility is likely to remain elevated whichever path OPEC+ chooses at this pivotal meeting, which will involve 8 member countries of OPEC+ including Saudi Arabia, Russia, Iraq, UAE, Kuwait, Kazakhstan, Algeria, and Oman.