Not a day passes without OPEC making oil and gas headlines, and today is
surely no exception. Seemingly in lockstep with OPEC, the market is once
again pacified on the promise that changes to the global oil supply glut are
a' comin'.
Yesterday, the Wall Street Journal quoted anonymous sources close to the
matter who had it on good authority that the Saudi's were willing to cut
"up to" 400,000 barrels per day (and that they had planned to do so
all along, with or without an OPEC agreement). We can assume this figure is
off August or September levels, which are near-record highs for the oil-rich
country.
Of course, there are 400,000 different possible production cut figures
included in this "up to 400,000" range -- including a big fat zero
-- so fundamentally speaking, like so much of the OPEC speak, this could mean
nothing.
But this isn't the first time OPEC chatter or supposition or guesswork has
moved markets, and it won't be the last. Because, as Oilprice contributor
Rakesh Upadhyay pointed out back in August,
just a month before the freeze was announced, fundamentals aren't what's
driving the oil market -- speculation is. And nothing feeds speculators like
OPEC.
As Upadhyay wrote, "Though most analysts agreed that a production
freeze was not going to alter the fundamentals, prices rose sharply, with the
hedge funds adding record long positions," as evidenced by the chart
below, which shows what happened in February when OPEC cuts were on the table
for Doha. Fundamentals didn't change -- the glut wasn't easing -- yet hedge
funds and speculation on OPEC rumors drove up prices.
The hope quickly faded when the Doha meeting fell short of expectations,
but prices continued to climb. Then, the market found new hope in the Vienna
meeting. We then wondered -- this time quite wistfully -- if a freeze could…
maybe, possibly… happen in that meeting over the summer, much in the same way
one might hold onto hope that we might someday win the lotto. Our hopes were
dashed yet again -- but not before the market reflexively inched up again.
Soon after, Saudi comments, which indicated that a new spirit of
cooperation among OPEC members might be taking shape, sending prices upward
yet again. An unofficial meeting was announced. Algiers, they said.
"Stabilize the market" they said (which can apparently be done with
talk, rather than production cuts). Russia chimed in, vacillating between
joining the "market stabilization" efforts and not. We asked
ourselves, this time ever more cautiously, dare we hope again? Most thought
not, but speculators threw caution to the wind, moving markets this way and
that on almost a daily basis in response to every utterance regarding the
freeze.
Then the announcement came that OPEC had reached a deal. The earth shook,
moving markets again -- this time by a large percentage -- and this time
backed up by a more tangible hope.
Meanwhile, the industry scrambled to make sense of what it all meant. How
big would the cut be? Which members would do the cutting? How did Saudi
Arabia and Iran reach any kind of consensus when they were worlds apart -- on
multiple fronts? And then there was the ultimate question that had every
analyst from here to Venezuela furiously figuring and calculating and
refiguring and recalculating: just how high could prices go?
Speculators continued to largely disregard the ins and outs of the deal,
which were absent at the time, and we saw markets tick up happily in
response.
When the size of the production cut -- between 240,000 and 740,000 barrels
per day -- was announced, one could feel the weight of the disappointment
within the industry overall. The analysts wanted more; wanted deeper. Most
OPEC members had been scrambling to reach record high oil production leading
up to the meeting, some successful. Given current production levels, the
small cut was seen by most analysts as a mere token gesture that would do
very little to address what most would agree is the reason behind the price
"problem" -- the global supply glut.
And further skepticism surfaced over the fact that no specific member had
agreed to any specific cut -- they just agreed that as a group,
"they" would do some cutting -- some months down the road -- and
that the "they" in that equation wouldn't be Iran. And it wouldn't
be Nigeria. And it wouldn't be Libya.
And still, amid all this ambiguity and mystery, and with some distant
promise to shave a mere 240,000 barrels of oil per day off OPEC's record
production figures, oil climbed above $50 a barrel. Today, Brent is trading
at $52.64, which is a 12-month
high-a monumental swing on mere talk.
And sure, some minor fundamentals have changed, such as five weeks of
crude oil inventory draws in the U.S., but those inventory numbers are still
way too high. In reality, OPEC hasn't actually done anything to ease the
glut. They've just talked… about talking… two months from now. In fact, the
only actions that OPEC has taken is to pump oil at record paces, adding to
the glut, and hoping that speculators will lap up what they're dishing out in
rhetoric. That's what OPEC is doing today.
So happy are the markets on this wispy nothingness, in fact, that some are
suggesting the oil markets are poised for a major meltdown, as speculators
buy up contracts that are equal to a year's worth of U.S. consumption --
amounts that can't possibly be delivered and will be pushed off to next
month's contracts or cancelled. To put this in perspective, there are 480
million barrels of oil on order for delivery in November to Cushing,
Oklahoma -- a facility that is capable of handling only 50 million per month.
What will also be pushed aside are some other cold, hard facts, such as
Libya's production increases, or Iraq's, or Iran's, and how fundamentally,
this means the remaining OPEC members would have to make deeper cuts to
offset these increases and still meet the organization's promised cut. Deeper
cuts that could hurt whichever member is tasked with taking on this burden.
But to keep the market's eye on the OPEC ball despite market saturation,
the Algerian Energy Minister, desperate to save his country from an economic
collapse, made yet another announcement on behalf of OPEC that the bloc would
be willing to cut yet another 1%
"if we need to" on top of the cuts proposed out of the meeting in
Algiers, adding that there would be even more meetings forthcoming -- the
first of which will be in Istanbul on Oct 9-13, again, on the sidelines of
another energy meeting, the World Energy Congress. But this time, the
informal talks about the freeze will include non-OPEC Russia and non-OPEC Azerbaijan.
As Reuters
reports, the meeting signals that OPEC "is more serious now about
managing the global supply glut." Russia apparently doesn't share this
perceived seriousness, with Russia's Energy Minister Alexander Novak saying
on Friday that he doesn't expect to sign a deal with OPEC during this
meeting. Just more talk.
And yet another meeting is scheduled in Vienna for October 28 and 29,
according to OPEC sources, followed by a "long-term strategy"
meeting on November 1-4, and a technical meeting again in Vienna on November
23 and 24, and possibly a follow-up meeting of the High Level Committee a day
later on November 25. Finally, recommendations will be presented at the
previously disclosed and much anticipated meeting on November 30.
That's plenty of evenly spaced talk that is sure to keep OPEC in media
headlines, and give the oil speculators something to play with until that
time. After that, it's anyone's guess as to how long prices will hold, but
it's likely that regardless of the outcome of the 30 November recommendation
meeting, OPEC will continue to feed the beast with talk -- and the market
will readily accept the handout, even if it's in lieu of the fundamentals.
