03.12.202409:16 Forex Analysis & Reviews: Oil on the Brink of a Scandal

Has oil found its fair value? Or is it hesitating to act ahead of the rescheduled OPEC+ meeting on December 5? The alliance, which controls about half of global crude oil production, reportedly plans to extend its production cut agreement until the end of the first quarter of 2025, according to four Reuters sources. Previously, the plan was to gradually phase out these commitments starting in December. However, revising this decision risks sparking a scandal.

Every major scandal starts the same way—someone says something. Often, this "something" is the truth. An OPEC+ official from Iran publicly stated what others feared to admit: the alliance is keeping oil prices too high, effectively subsidizing its competitors. This strategy of supply restrictions is leading to a rapid increase in production outside OPEC+, particularly in the U.S., fueling discontent. Angola has already left the alliance—who might be next? Gabon? Equatorial Guinea? Congo?

Oil Volatility Dynamics

What decision will OPEC+ announce on December 5? No one knows, and the markets are holding their breath. This will lead to reduced volatility and Brent consolidating in the lower part of its trading range at $71–$75 per barrel.

Bullish news for Brent comes from China, where business activity has reached a seven-month high, and from the breakdown of a 60-day ceasefire between Israel and Hezbollah. Attacks by the terrorist group triggered retaliatory strikes by Israel on Lebanon.

However, Brent faces pressure from the strong U.S. dollar, Saudi Arabia's decision to lower oil prices for its Asian buyers to a four-year low, and a rise in OPEC+ production in November to 27.02 million barrels per day (bpd). This marks the second consecutive monthly increase, with October's production exceeded by 120,000 bpd, primarily due to Libya resolving supply disruptions caused by a political crisis.

Oil and U.S. Dollar Dynamics

Investors are concerned that the Federal Reserve may not cut the federal funds rate in December, which could strengthen the U.S. dollar. In this context, FOMC member Christopher Waller's remarks that the current monetary policy remains tight and needs to be eased have provided fresh air for crude oil.

In my view, even if OPEC+ abandons plans to increase production, Brent bulls won't celebrate for long. The surge in business activity in China is a temporary phenomenon ahead of the implementation of U.S. tariffs. On the other hand, Donald Trump's intent to ramp up U.S. oil production is no laughing matter.

On Brent's daily chart, breaking out of the consolidation range of $71.0–$75.0 per barrel could lead to a resumption of the downtrend. An aggressive strategy would involve selling from $71.5.