Something unprecedented happened last November when OPEC sat down in Vienna to hammer out the final terms of its oil production cut deal (which, incidentally, has yet to translate into a drop in record high inventories): one day before the summit, the oil producing cartel - or rather Saudi Arabia - secretly invited hedge funds to sit in on the negotiations and provide OPEC with input on what to do. However, news of the meeting leaked shortly thereafter, and was reported by the FT: "Saudi Arabia convened private talks with the world’s largest oil traders in Vienna before OPEC’s crunch meeting on whether to cut oil output.”
Mark Couling, head of crude oil at Vitol, the world’s biggest independent oil trading company, was invited to Vienna by the Saudi delegation, according to people with knowledge of the talks. Pierre Andurand, who runs the $1.5bn Andurand Capital fund, one of the world’s biggest oil hedge funds, was also invited, alongside at least one trader from Russian independent oil company, Lukoil.
Mr. Couling and Mr. Andurand attended a meeting with the Saudi delegation on Tuesday morning, before the kingdom’s oil minister, Khalid al Falih, arrived in Vienna, people familiar with the meeting said. A trader from Litasco, Lukoil’s trading arm, also attended, they said.
Why this overture by the Saudis to invite and give traders responsible for shipping millions of barrels of oil and trading billions in crude derivative a potential first look? As the FT explained at the time, "Saudi delegates have previously done so on occasion when they were looking to get a better feel for the market."
It is now four months later, oil is modestly higher, but not too high, and conversation has recently shifted away from OPEC's favorite topic - production cuts - to something far less enjoyable: surging shale production. Shale production, which threatens to take away market share from the Saudis and OPEC, is a determining factor in whether or not OPEC will extend the production cut deal beyond the first half of the year. It also appears that OPEC is once again nervous because, as the WSJ reports, the "Organization of the Petroleum Exporting Countries is on an unusual listening tour, in which it exchanges views with hedge funds, investment banks, and other big financial players while trying to figure out how the market reacts to its moves."
In other words, just like last November, OPEC is again colluding with hedge funds.
The private meetings with oil traders and money managers in London and New York, along with a planned gathering this week at a conference in Houston, are a departure for OPEC. The cartel’s leaders have long derided oil-futures-contract traders as “speculators” who cause unnecessary volatility in crude prices.
Now, OPEC and its most powerful member, Saudi Arabia, are wooing traders, trying to convince the market they are serious about raising oil prices with a nearly 5 percent production cut agreed to in 2016.
More importantly, "the oil producers are also trying to understand how traders and banks make decisions." Or rather, how traders make "buy" decisions instead of selling.
OPEC Secretary General Mohammad Barkindo has met with a series of hedge funds and oil buyers. Among them: BBL Commodities Value Fund, a $540 million investment vehicle run by ex- Goldman Sachs trader Jonathan Goldberg; Ospraie Management, headed by veteran commodities investor Dwight Anderson; Taylor Woods Capital, managed by former Credit Suisse trader Beau Taylor. In addition to hedge funds, Barkindo met with "plain vanilla" corporations such as EasyJet, the U.K. budget airline that buys and sells oil-market derivatives to hedge against fuel-price rises.
This week, Mr. Barkindo said he would meet hedge funds on the sidelines of CERAWeek, a conference in Houston featuring the oil industry’s biggest players, including Saudi oil minister Khalid al-Falih. Related: Oil Prices Under Pressure From Record Breaking Inventories
Unlike Vienna, when the meetings were supposedly in place to advise OPEC "how the market reacts to its moves," this time "efforts are aimed at building confidence in OPEC,” said Ed Morse, global head of commodities research at Citigroup. Morse organized a private briefing with Mr. Barkindo for dozens of hedge funds, oil companies, and big oil buyers at the Corinthia Hotel in London on Feb. 20, according to the WSJ.
Now, why would OPEC be worried about building confidence? Simple: many are starting to doubt OPEC's drive to cut production, especially since there are just under 4 months left before OPEC may have to revert to its old production: "Oil traders have been skeptical about OPEC following through on production cuts, with members historically pumping far more than pledged."
OPEC formed a coalition of 24 oil producers—including 11 outside of the cartel—to pledge cuts of nearly 1.8 million barrels a day of supply from the market. Mr. Barkindo oversaw the formation of the first-ever compliance committee to soothe fears that members would pump more than they agreed to.
Mr. Morse said Mr. Barkindo wanted to go farther, making a “concerted effort to interact with the financial sector.” OPEC wants to “better understand how [its action] impacts oil prices,” he said.
The above activity, taken in the context of private meetings with hedge funds, has another word for it: collusion to "convince" the "evil speculators" to push prices higher because, supposedly, OPEC is telling the truth.
And, as noted above, the WSJ points out that "the coordinated outreach to Wall Street is unprecedented for OPEC and its biggest producer, Saudi Arabia." So why do the meeting? Perhaps it is to give hedge funds a "inside glimpse" into what comes next, and in hopes of acquiring goodwill, get hedge funds to buy even more. Although some may respond that in going through all the extra efforts, OPEC is telegraphing that it may, in fact be, "protesting too much." After all, why would there be a need for such secret meetings if supply was indeed below demand? Perhaps the weekly all-time highs in oil inventories and the historic gasoline glut are the best indicators that there still is just too much supply, whether or not OPEC actually did cut production. Related: U.S. Shale Production Growing At An Unprecedented Pace
So, what does Barkindo want to glean from his hedge fund meetings? Mr. Barkindo has asked about the declining role of investment banks in commodity-futures trading and the increased use of automated trades, according to people who were present. He also asked why U.S. banks were so quick to reinvest in American shale producers after the bust and what would happen if prices fell again, said the sources, who were asked not to disclose the substance of the talks.
Yeah, about that, Barkindo may want to talk to the world's central banks who have flooded markets with so much cash, banks are delighted to "reinvest" in shale producers and will do so every time there is even a hint of distressed opportunities.
There was more: "Mr. Barkindo was also especially interested in how quickly stockpiled oil would be sold off as prices rose,” the people said. OPEC has said its production cuts are meant to quicken a sell-off in record levels of stored oil—stockpiles that built up when traders bought cheap crude and hoarded it to sell at a profit later. “He was mostly listening. He was not confrontational,” said a source who attended the meetings.
There was reverse inquiry too: "traders have quizzed Mr. Barkindo on whether OPEC will extend its production agreement at its next meeting in May. Mr. Barkindo said it would depend on whether stockpiled oil had fallen to a five-year average at the end of May."
Which, again, brings up the logical question: if OPEC is indeed cutting production, why has stockpiled oil reached all-time highs?
And since the answer is obvious, one hedge-fund manager told Mr. Barkindo about the importance of extending those cuts, "An extension would cause him to shift his views and bet that oil prices would keep rising,” the sources said.
It's not only hedge fund managers who would bet on oil prices rising, shale companies will too, and will produce accordingly, leading to a further deluge in crude oil which would allow the U.S. oil industry to grab even more market share from Saudi Arabia. Saudi Arabia then finds itself in yet another dilemma: keep the cuts and lose market share while oil may (or may not) rise fractionally more or revert back to the "every oil producer for himself" post-November 2014 regime and pray that this time it will finally succeed in taking out shale. Sadly for OPEC, it will fail for one simple reason: as we showed over the weekend, the breakeven prices for shale companies continue to plunge, and will keep doing so until shale becomes the price setter, leaving Saudi Arabia - and OPEC - in the cold.
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