What does 2017 hold in store for oil

OPEC's decision next week will set how oil markets start 2017. Considering their performance in January 2016 it wouldn't take much to be an improvement. While we believe the odds of OPEC firming up their production cut agreement have shortened, it is important to remember that we have been close to a deal several times so far this year only for it to be upended at the last minute.

There are several potential outcomes from next week's meeting, each one of which will have its own impact on prices.

• Do nothing. OPEC fails to reach an agreement on how to distribute production cuts and members are left to their own devices. Prices would likely react sharply to the downside in the immediate aftermath but the low prices would mean less non-OPEC oil entering markets and could ultimately be beneficial in the aim of rebalancing and securing long-term market share.

• OPEC reaches a verbal agreement but it is short on details. This is the 'cosmetic cut' option and has essentially been OPEC's main channel for affecting prices so far this year. This is the easiest and lowest cost option but unless it is backed up by removing barrels from the market, it essentially preserves the status quo.

• Commit to a target range of 32.5m – 33m b/d and allow several countries exemptions. This would put the Algiers agreement into force and would mean carve-outs for Nigeria, Libya and Iran as their production has been impacted by factors outside their control. The burden of cuts then would fall heavier on the rest of OPEC, particularly on producers like Saudi Arabia, the UAE and Kuwait.

• A firm deal on cutting production. OPEC agrees to a collective target of 32.5m b/d to be implemented from Q1 2017. While this would not balance the market immediately it would help push the market into deficit by the second half of the year and would be supportive for prices, at least for a few months. A price rally on the back of an OPEC cut however would help non-OPEC producers too and could mean any market deficit is fleeting as they add on production.

As the market grew skeptical that the Algiers deal could be easily implemented oil prices gave up more than their post-agreement gains, falling more than USD 10/b from their year-to-date peak of USD 53.73 in early October. Considering the scale of the move, the stakes are high for OPEC to come out of next week's meeting with a positive outcome. 

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