In Oil & Companies News 23/09/2016
One day major oil producers support a production cap, and the next day they don’t.
Members of the Organization of the Petroleum Exporting Countries and Russia will meet on the sidelines of the International Energy Forum in Algeria on Sept. 28 and it could end just like the summit in Doha did last spring—without an agreement to limit production—as producers haggle over who makes the first move.
As was the case ahead of the April meeting, comments from big oil producers have fed volatility in the market, with large price swings for crude oil CLX6, -0.26% LCOX6, +0.21% in either direction becoming the norm since early August, when OPEC announced plans for the gathering.
“Russia, Saudi Arabia et al discovered earlier this year that jawboning has a marked impact on market sentiment,” said Matt Smith, director of commodity research at ClipperData. Even if that jawboning doesn’t rally prices “it serves to unwind financial positioning that may be skewed bearish.”
“Given how this formula worked so well already this year, they have every incentive to keep making these comments—ad nauseam—until the market finally ignores them,” he said.
Just this month, Saudi Arabia and Russia said they would work together toward an agreement to stabilize the oil market, but data show that both countries have been hiking output.
Iran said it won’t participate in a pact to freeze oil production because it’s still working on ramping up output to pre-sanction levels, but at times it has appeared to soften its stance.
Remarks by OPEC Secretary General Mohammed Barkindo are just as confusing. Last weekend, Barkindo said that no decision would be made at the informal meeting in Algeria. But according to news reports, he also said that OPEC members may call an extraordinary meeting if they reach a consensus at the forum.
“The informal gathering was proposed as a move to having an extraordinary meeting with the aim of taking decisions to stabilize the market,” Barkindo said.
Russia, meanwhile, has said that it will support a deal to stabilize oil for one year, but at least one analyst pointed out that the country’s September output reportedly reached a new post-Soviet era high at over 11 million barrels a day.
James Williams, energy economist at WTRG, said that some discussions may be held on Sunday before the meeting.
“If they reach an agreement, OPEC will need a special meeting to formally ratify it,” he said. “It is even possible that OPEC would convene an extraordinary meeting in Algeria if all members are in attendance.”
But there has also been speculation that the so-called “informal” meeting, may turn into a “formal” one. If that’s true, “the likelihood of a major policy announcement at this meeting has gone up dramatically,” said Phil Flynn, senior market analyst at Price Futures Group.
OPEC’s next scheduled meeting is on Nov. 30 in Vienna.
Pact prospects
Williams said that he would have set the chances for an agreement at something like 10% to 20% a few weeks ago, and while the odds are “definitely higher now,” reaching a pact is “far from a certainty.”
“The chances of success are compounded by the flexibility that will be necessary,” he said.
“Iran will still want 4 million barrels a day, which is above current production,” said Williams. And neither Libya and Nigeria, where production has been disrupted by unrest and violence, will be willing to accept current production as a ceiling.
“It all comes down to Saudi Arabia” and whether it’s willing to cut production if additional production comes online from Iran, Nigeria and Libya,” he said.
Anas Alhajji, an independent energy expert and former chief economist at NGP Energy Capital Management, agreed.
“The difference between $30 and $60 (a barrel for oil) depends on whether the Saudis cut production to pre-summer levels,” said Alhajji, emphasizing that the Saudis usually increase production in the summer and cut it at as autumn begins “regardless of OPEC actions.”
That would mean the market has to first “distinguish between a decline in Saudi production at the end of the summer after an increase during the summer, and the talk about [a] freeze or production cut among OPEC members. These are different things,” he said.
‘Red herring’
Overall, the idea of a production freeze is misleading.
Omar Al-Ubaydli, a program director at the Bahrain Center for Strategic, International and Energy Studies, referred to the output cap speculation as a “red herring.”
Everyone is producing as much as they can or want to produce anyway, “so an output freeze is equivalent to all the runners in the 100-meter final saying: ‘Let’s agree to not run faster than 9 seconds’.”
“In that case, they just want to project collective power,” said Al-Ubaydli, who’s also an affiliated senior research fellow at the Mercatus Center at George Mason University.
Some producers may intend to exhibit “willful production restraint,” but an agreement would “unravel within days or weeks since there is no reliable way to monitor cheaters and everyone has a history of cheating,” he said, adding that OPEC had a 96% output quota violation rate from 1980 to 2009.
Alhajji said the possibility of OPEC action in Algeria next week and at the November meeting in Vienna are both “zero.”
If producers are talking about capping output at January 2016 levels, then some countries have to cut production “which is not going to happen,” he said.
Source: Market Watch
