In the midst of a week of bad to terrible news for oil prices, OPEC tried to alleviate concerns that its meeting this November will, in fact, produce a meaningful deal on production cuts.
“We remain deeply optimistic about the possibility that the Algiers agreement will be complemented by precise, decisive action among all producers,” announced OPEC via its regular publication, “OPEC Bulletin.” The announcement came as industry analysts and pundits criticized the organization, casting doubt on its ability to deliver a deal on a production freeze. OPEC was also very visibly lashing out at critics who have criticized its ability to influence markets in a substantive way.
The September announcement helped push prices past $50 for over a week, before they plunged back down to $44 this week. The decline was largely attributed to massive inventory build reports from the EIA and API. The zig-zagging of prices mirrors a similar trend from last April, when an anticipated OPEC freeze deal at Doha helped send prices up before disagreements between Saudi Arabia and Iran caused Riyadh to scupper the deal, leaving markets to tumble.
At this point, with an imminent OPEC meeting and consistently weak fundamentals, serious investors need to ask themselves: why trust OPEC? Why place any confidence in its ability to manage production or influence the market to send prices in positive directions?
First, the basics: OPEC accounts for just over 40 percent of global production, with the bulk of production coming from its largest members, Saudi Arabia, Iraq, and Iran. From November 2014 onwards, Saudi Arabia has committed itself to increased production, in an attempt to drive down prices and force competing producers (including U.S. shale oil drillers and fellow OPEC member Iran) from the market.
The Saudi effort, as recently reported, probably yielded it about 1 percent extra market share. In the meantime, Saudi currency reserves have plummeted. The state budget faced a $95 billion deficit in 2015 and the deficit for 2016 is likely to exceed $80 billion.
This campaign ended recently with the Saudi decision to push for a production freeze in September. But the announcement in September, which was essentially a promise that a deal would be reached even if no one knew how, immediately triggered dissent within the ranks of OPECs non-Saudi members. Specifically, it’s other two top producers had serious problems with the Saudi position and they made their feelings known last week.
Iran has pushed for an exemption from production limits, arguing that it has yet to recover from the sanctions that were lifted in January. Iran’s oil minister Bijan Zanganeh had previously declared Iran’s intended target was 4 million bpd, but in October Iran announced it hoped to pump as much as 4.28 million bpd of crude and 1 million bpd of condensate within four years, according to Bloomberg.
Recent reports from Reuters indicate running tensions between Tehran, which is determined to boost production, and Riyadh. The Saudis have reportedly threatened to raise production even further, potentially past 11 million bpd, if the Iranians don’t comply with a production freeze deal. Their offer of a deal, cutting their own production to 10.2 million if the Iranians cut their own to 3.6-3.7 million, isn’t likely to cut much ice with the Iranians, who have been pushing for higher production for nearly a year. Related: Expert Commentary: Why Oil Tanked And Why It’ll Stage A Comeback
And what of the Iraqis? OPEC’s second-biggest producer has been disputing official OPEC figures, arguing that its production level is being badly misjudged by the OPEC secretariat and its secondary sources, the means by which OPEC sets production quotas. Iraq has, for decades now, been exempt from any production quotas, and it is now fighting an expensive and destructive war against ISIS. It badly needs oil revenues, both to keep its economy afloat and pay for national reconstruction once ISIS is pushed out of Mosul. So the Iraqi objective is to support a production freeze (which would raise prices) without having to cut its own production.
This situation has become more complicated however, as the independent Kurdish region of northern Iraq, itself a significant oil producer, has disputed Iraq’s own oil production figures. In September, Baghdad released a rare field-by-field breakdown of its oil production, and included the Kurdish fields: but the Kurds have argued that its fields were double-counted, creating a 290,000 bpd discrepancy between the Kurdish and Iraqi figures.
This throws the whole question of oil production figures into question. OPEC estimates Iraqi production at 4.4 million bpd, while Iraq has claimed it produces 4.7 million bpd, a figure which the Kurds have now revealed to be false. Related: Nigeria Requires Constitutional Revisions To Stop Oil Attacks
Disagreements over OPEC’s figures and domestic figures have been a stable of OPECs internal politics, going back to the 1980s. But this current dispute is particularly important, as Saudi Arabia will need Iraq’s tacit approval of a production freeze to give it the necessary legitimacy. Exemptions have already been granted to Nigeria and Libya; without Iraq and Iran, cuts from Saudi Arabia and other members wouldn’t make a dent in the global supply-demand balance.
So again, the question is: why should investors take OPEC seriously? When its internal politics have become so disruptive, when its ability to influence the market and global production in meaningful ways appears so limited, and when its chief members threaten to increase production before implementing a freeze, are there compelling reasons for serious market watchers to give the world’s oil cartel which isn’t a cartel the time of day?
If a production freeze is reached on November 30, it will be a small miracle and could send prices back up above $50. But it is likely the criticisms of OPEC and doubts about its continued relevance will only grow.
By Gregory Brew for Oilprice.com
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