The market may be too complacent about bullish headline risk at the Doha meeting, even though the fundamental impact is likely limited. Bearish catalysts are more likely to come from poor compliance, producer hedging and the macro, not the meeting itself.
* Key items to watch:
1) Commentary - primarily Saudi Arabia, Iraq and Iran - will be most important.
2) Who will participate and allowances for Iran.
3) How are production caps set (Jan or Feb, production or exports, submitted figures or actual) and the timing for implementation. 4) Enforcement mechanisms.
5) Are production caps monthly or annual to account for production seasonality?
6) Next steps and setting expectations for the June 2 OPEC meeting.
* Plenty of reasons for skepticism about impact:
According to Rapidan, the "freeze" is more about talking up prices and politics than action.
Other issues:
1) Producers submitted higher numbers to JODI for Jan/Feb than current production.
2) Several members announced efforts to grow.
3) Iran has not agreed to a cap and will be one of the few producers to grow in 2016.
4) At best, this is a higher quota and compliance with quotas has been poor.
* Market may be underestimating near-term headline risk. Oil remains a
technical and headline driven market. Consensus is right to be dismissive of
the fundamental impact of a freeze, but we continue to see prices react to
headlines and the rising probability of a deal, even if it's known. A deal not
only seems likely - as leaks and prior announcements have suggested- but
confirmation of the deal, greater clarity about the freeze or hints of further
OPEC action could reinforce the bullish sentiment. That said, any upside should
be limited at current price levels by producer hedging. The bull case would
involve Iran agreeing to any cap and OPEC committing to more action in June.
The bear case is that the deal falls apart (low odds in our view), but we would
still expect positive spin and a commitment to continue talks.
* Positioning is not the concern it was for the OPEC meeting. Unlike the
Dec-15 OPEC meeting, we have not seen a large increase in near-dated OTM
call buying even though call skew has risen. Rather, put open interest has risen
more as oil has rallied. Thus, the risk that unwinding these calls will put
downside pressure on the market, as it did in Dec, is lower.
* Our concerns focus on subsequent headlines and potential
disappointment after a deal is in place. Given positioning, we don't see the
meeting as a bearish catalyst. However, premature rallies typically do not end
well, and subsequent weeks offer more risk. More likely bearish catalysts
include signs of rising production, even if seasonal, or disappointment at the
June OPEC meeting. Higher prices could also slow demand and non-OPEC
declines, while encouraging more hedging/selling pressure - even from large
sovereign producers. Lastly, a return of USD strength, disappointing GDP (esp
EM) or potential product oversupply are 2H16 risks.