The new OPEC+ deal appears to be a massive success both for oil producing nations and the market. Agreeing to boost production in January the group could convince market participants that surplus inventories will nevertheless decline. The deal was somewhere in the middle between the worst and the best possible outcome of the meeting. Oil-producing nations will start to increase output from January 2021, but great flexibility of the new plan was a key to soothe market concerns.

This week was difficult for OPEC as due to disagreements the meeting scheduled for Tuesday had to be postponed to Thursday. The deal participants came to a new agreement, but initial market reaction to it was tepid. OPEC+ plans to increase production from the current level by 500K bpd starting from January 2021, which is less than in the worst-case scenario (1.9 million bpd). In doing so, the organization will monthly assess market conditions in order to better adjust the supply. The deal also included the condition that the members cannot increase output by more than 500K bpd per month.

The best outcome for prices would be to extend current output cuts for another three additional months, however, judging by the market reaction, the market liked the OPEC+ flexible output plan.

At first, the market reacted with a small upward leap, but on Friday spot prices increased by another 1%. A barrel of WTI was trading above $ 46 a barrel, the highest level since early March while Brent was trading above $49 a barrel. An important point was the very fact of the deal - recall that in March prices collapsed due to the fact that among the main producers a short-term situation arose where "everyone produces as much as they want."

The parameters of the deal were determined in such a way that implementing it OPEC+ should keep the market in a deficit, thus drawing down inventories and pushing prices up. As a new coronavirus shock becomes less likely to happen, there are no major obstacles for a recovery in demand, so prices have a room to rise. In December, Brent will probably be able to touch $51 per barrel, but it is preferable to wait for a pullback, if we want to bet on this outcome:

However, next year, after Biden moves to the White House, Iran's return to the market could become a serious threat to the market. In other words, the risk of successful negotiations between the United States and Iran on the nuclear program. If sanctions on Iran are lifted, the market will face a challenge in the form of a potential 1-2 million barrels of additional supply from Iran. However, this risk is not traced on the horizon of 3-4 months.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.