With markets rattled and oil prices tanking after being bombarded on a variety of fronts, OPEC has attempted to bring some calm to the market regarding its optimism that it will be able to reach some kind of a deal. But will the market buy it?
Oil prices this week took a tumble on the back of several pieces of bearish news, including Iraq’s and Iran’s publicly shared resistance to any deal, an unfavorable API report that said the U.S. saw a build of 9.3 million barrels of crude, and then the death blow, with the EIA on Wednesday reporting a 14.4 million barrel inventory build. For perspective, we’ve not seen a build of that size in over three decades.
We all know this excess inventory isn’t just going to evaporate overnight. And the facts are that OPEC and Russia are producing oil and record levels, all the while holding meeting after meeting to discuss the prospect of “stabilizing the market”.
This week, at least, with three punches to the gut, the market’s hope is waning, and analysts are growing increasingly skeptical that a deal will ever be reached and are doubtful that the global glut will diminish anytime soon.
Accordingly, crude oil prices are down about 8 percent this week alone—a drop that probably has many an oil-dependent nation shaking in their boots.
OPEC’s response to this week’s poor oil-price showing was fairly predictable: Calm the market with words. Assure the market that a deal is still doable (despite the fact that I could rattle off at least four OPEC members who are beyond reluctant to participate, including Iraq, Iran, Libya, and Nigeria). Tell all the deal critics and oil and market analysts that they’ve got it all wrong, despite OPEC’s historical propensity for ignoring production quotas.
Thursday’s statement, which is included in the monthly OPEC Bulletin, goes like this: “We remain deeply optimistic about the possibility that the Algiers agreement will be complemented by precise, decisive action among all producers.” Related: Nigeria Requires Constitutional Revisions To Stop Oil Attacks
It’s important to view the statement carefully, noting the strategic mix of noncommittal terms (“possibility of”, “complemented by”) and specific terms (“Algiers agreement”, “decisive action”, “all producers”). The market knows that all producers won’t be cutting production. Perhaps the market will be wooed by the fact that OPEC is “optimistic” that the precise and decisive actions taken by all producers, whatever those may be, will complement the near detail-less Algiers agreement, which pledged to curb (by unnamed countries) oil production to the tune of a couple percent—a cut that would likely happen anyway this time of year, following a seasonal reduction in demand.
OPEC went further in its statement, chastising “industry observers” who have been “too harsh to criticize the organization or its member countries.” “Over the years, we have seen how wildly inaccurate their predictions have been. What many of them have failed to recognize is that OPEC’s great strength is its global reach and its diversity.”
Despite this “global reach”, OPEC also took this time at open mic night to point out that it is responsible only for 40 percent of the world’s oil production, and that the “lion’s share” of the global oil output comes from non-OPEC sources.
By Julianne Geiger for Oilprice.com
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