The phrase ‘buy the rumor, sell the news’ is overused on Wall Street for a reason. Prior to significant events, prices tend to rise on rumors and then drop sharply following a highly anticipated event. Looking at WTI, the last OPEC meeting (May 25, 2017) is a great example of this pattern.
Rumors of deeper OPEC cuts ultimately unfounded
Prior to the event, crude oil speculators drove WTI prices above $50. At the time, some speculated that OPEC may extend and deepen supply cuts simultaneously. While OPEC met Wall Street’s consensus expectations by extending supply cuts to the first quarter of 2018, prices fell nonetheless. On the day of the announcement, prices dropped by 4%. Over the next several weeks, WTI proceeded to weaken until ultimately bottoming around $42 per barrel. The almost 20% drop in crude oil prices from its earlier peak occurred in spite of the fact that (1) net speculator positions in futures & options were not at extremes based on CFTC data, and (2) underlying demand growth was running significantly ahead of supply at the time. In other words, both sentiment and fundamental drivers of crude oil were supportive of higher prices. A historical overview of WTI prices is shown below for reference:
The market front runs the OPEC announcement
Source: NYMEX futures / TradingView.com
The stakes are much higher today
Given price action in crude the last time, the stakes today are much higher for three reasons.
Firstly, speculation is rife that another supply cut is imminent following King Salman’s landmark visit to Russia earlier this year. As the first Saudi monarch to visit Russia, the event was significant as the two countries are supporting opposite sides in the ongoing Syrian conflict. Russia has also been a traditional ally of Iran, Saudi Arabia’s arch nemesis in the Middle East. Despite the historical differences, the two countries appear to be cooperating as higher crude oil prices are in everyone’s interest. The event was marked by significant pomp and ceremony, and Saudi Foreign Minister Adel al-Jubeir claimed that “relations between Russia and Saudi Arabia have reached a historical moment.” Following the event, expectations are high that another OPEC/Russia supply cut extension is in store.
