Mistrust In OPEC Makes For A Sour Deal

Yesterday, after a lot of talk and much speculation the leaders of OPEC emerged from an unofficial meeting at the Algiers energy summit and shocked a lot of people, not least of all your humble correspondent, by announcing a deal. The oil markets reacted as you might expect when conventional wisdom is defied, i.e. sharply. WTI jumped up around 7 percent immediately the news came out. Overnight, though, futures came off the highs and, in volatile markets yesterday, there was little follow through to higher levels. WTI eventually settled less than a dollar higher than yesterday, and is still in a long term downward trend. Traders, it seems, were asking themselves the questions, is this a real deal, and if so what effect will it have?

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Call me a cynic, but when OPEC’s Secretary General, Mohammad Barkindo came out with a big smile and his thumbs up it reminded me too much of Howard Macmillan returning from a meeting with Hitler and declaring “Peace in our time!”…just before the Nazis invaded Poland. Barkindo announced that OPEC had reached a great deal, but then as details emerged some began to question that. They have, in principle, come to an agreement to cut overall production by cartel members from 33.2 million barrels a day in August to 32.5 million after November. That represents a roughly 2 percent cut from all time record levels that have produced a huge global glut of crude.

That doesn’t sound like too big a deal, but those bullish on oil from here will no doubt point out that people like me thought there was little chance of any deal, so this at least proves that OPEC still has teeth. Well…not really. You see, what was missing from this agreement was the most important part, who will actually cut and by how much. Of course everybody agreed to a cut in principle, probably all believing that they could get away with forcing others to actually reduce production. The hard part of the agreement will not even get talked about until the scheduled OPEC meeting on November 30th, yet the first shot in that debate has already been fired. Yesterday Iraq started to question the production levels off of which the cuts were based. Given that getting Iran and Saudi Arabia to agree was always going to be the stumbling block here that is not a good sign.

Let us for a moment, though, assume that those two nations, who are currently fighting proxy wars in Yemen and Syria, do reach an agreement, and peace and goodwill breaks out all over the Middle East. That would still not be the end of the story. Back in February, then Saudi Oil Minister, Ali Al-Naimi declared that cuts wouldn’t work, as history showed that nobody stuck to them. That comment may have contributed to Al-Naimi losing his job, but if so that wouldn’t make him the first person ever punished for speaking an uncomfortable, inconvenient truth. The lingering distrust between Iran and Saudi Arabia makes adherence to any agreement fairly unlikely.

The answer to the question of deal or no deal, then, seems to be “no deal”. What Barkindo announced with such joy on Wednesday is essentially an agreement to talk about an agreement. Without basic details, and with mistrust already surfacing two months before the scheduled meeting, the Secretary General’s optimism look, to say the least, somewhat premature.