OPEC Just Turned Oil Markets Around – and No One Noticed
As I predicted, there will be no agreement on capping oil production coming from the current International Energy Forum (IEF) summit in Algiers.
Now, pundits had been looking for a “bottom line” coming out of Algiers, one that would telegraph an agreement to freeze (or cap) oil production.
This was never how it was going to play out.
With national priorities varying across the board among both OPEC members and primary non-OPEC producers (led by Russia), no consensus on a final accord could possibly be worked out during just three days of meetings.
So the media have reacted, and declared that Algiers was a complete failure.
But that’s not true either.
In fact, the Algiers meeting marked the beginning of something huge.
The One Reason Why Algiers Was No Failure
These IEF summits happen once every two years, with energy ministers, officials, CEOs of national and international oil companies, and representatives from some of the world’s largest banks meeting to discuss trends and prospects in global energy.
That allows for informal meetings on the margins of the proceedings. These private sessions can have significant implications for the markets, especially when they deal with major policy issues or production moves.
And that’s exactly what happened this time, with OPEC and non-OPEC oil producers meeting to discuss oil prices and production levels.
Sure, no official, detailed deal was agreed on. But that doesn’t mean these meetings weren’t important.
Quite the contrary – for one overarching reason…
The IEF Was the First Step to an Oil Deal
The main focus in these sessions wasn’t a final deal. Rather, these sessions were meant to lay the groundwork for the process.
Fighting the global oversupply of oil by engineering a balance between expected levels of international demand on one hand, and the supply that is actually delivered to the market on the other, requires a complex coordination of national policies.
Traditionally, you would influence prices by managing production levels. Put simply, in the absence of huge spikes or interruptions in demand, cutting production would increase prices, and opening the taps would decrease prices – Basic Econ 101.
Under this approach, oil producing countries would sell less oil, but their oil reserves would increase in value. That allowed producers (and even end-users) to use reserves as the basis for hedging and issuing derivatives.
Oil Producers Infighting is Hurting Everyone
The environment of the past twenty months has remarkably changed the terrain. These days, oil producing countries are all focused on market share, not price. Increasing that share is essential in a declining revenue scenario. You can’t just wait for a slow uptick in global demand to solve your problem.
Instead, a meaningful increase in market share can only result from wrestling market share from some other provider, by undercutting them with discounts, hedges, and other, more esoteric ways to lower the price.
This desperate zero-sum race has been underway for some time, pushing down oil prices for everyone.
In this situation, there is no advantage to leaving oil in the ground. Doing so just decreases its value. Instead, the smart thing to do is to extract and sell it without regard to the actual return. The longer it’s left in the ground, the less it’ll be worth anyway.
As you can imagine, this is an unsustainable recipe for disaster.
In addition, the fermenting geopolitical situation has also taken its toll. The primary problem remains the high level of tension between Saudi Arabia and Iran.
Now, Riyadh has offered to cap production if Iran would do the same. Meanwhile, the Iranian Oil Minister did say last week that his country is in favor of working with other producers to provide market stability, a position mirrored by all other OPEC member and the Russians.
But the devil, as always, is in the details…
Expect More from OPEC’s Next Meeting
Tehran, you see, has declared it would only cap production after first reaching pre-sanction levels of about 4.2 million barrels day (about 600,000 barrels above estimated current totals).
It is against this backdrop that the Algiers meetings are being held. Slow progress toward a consensus is the only possible approach.
And that has now begun.
The next regular OPEC meeting takes place at the organization’s Secretariat in Vienna on November 30. We are likely to see a signal that a move on production levels is in sight before then.
That will emerge as a call for an extraordinary session, to include non-OPEC countries such as Russia, in four to six weeks, similar (but more successful) than April’s Doha summit.
Now, that event was convened to discuss a cap based on January’s aggregate production levels. It failed when Saudi Arabia refused to move forward unless Iran (who was not even attending) would join in.
All of OPEC (and many beyond) have suffered through five months of financial pain between Doha and Algiers.
But that may end soon.
The thud in late September may yet result in a bang in early November.