Why OPEC Is Colluding With Hedge Funds

Tyler Durden's picture

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 of all time 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, seeking views about the likely market reaction should they fail to clinch a deal, it has emerged.

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 which threatens to take away market share from the Saudis and OPEC, and whether or not OPEC will extend the production cut deal beyond the first half of the year.  It also appears that the 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% 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.

The details: following the abovementioned Vienna meeting, 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 which is 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.

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." More 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 the OPEC's drive to cut production, especially since there is 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 inventory, and historic gasoline glut, are the best indicator that there still is just too much supply, whether or not OPEC actually did cut production.

* * *

So what does Barkindo want to glean from his hedge fund meetings? As it turns out, a major point of interest is how algos are trading these days (expect more flashing red headlines to ignite algo buying). But far more important was the following disclosure: [Barkindo] 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.

In meetings with traders, 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 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 the world 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 person 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: why - if OPEC is indeed cutting production - has stockpiled oil not only not fallen at all, but has risen to fresh record 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 the hedge fund manager who would bet that oil prices rise: shale companies will too, and will produce accordingly, leading to a further deluge in crude oil, and allowing the US oil industry to grab even more market share from Saudi Arabia, which suddenly 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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slightlyskeptical's picture

Make the hedge funds irrelevant by only allowing oil contracts to be made between producer and end user.

My Little Pony's picture

Progressive Guinean presidential candidate Abou Berete chooses the Accredited Times to take his campaign worldwide. 


A very sensible choice of news media to get his message heard - join him in the comments thread as he fights back against right-wing trolls.

venturen's picture

long term....technology is going to lower price of oil..... Also hedge funds should be taxes just like everyone else....their preferential tax treatment is the only thing they have going for them....also a tax on transactions of stock and commodities to limit trading to FUNCTIONAL....not HFT!

Fiberton's picture

Without the trading of speculation and liquiity that keeps the price much more stable price would zig zag wildly and more than likely be about 2 to 3 times higher. Only about 2% of oil contracts are used in oil production.  This is what some would call a necessary evil.

actionjacksonbrownie's picture

Automated trades = RIGGED

curbyourrisk's picture

Sounds like someone needs a war.. and pretty damn quick too.

NoDebt's picture

Um, Tyler, normally you don't miss the elephant in the room, but I think the fact that Saudi ARAMCO is going up for IPO here in a bit has a SHIT TON more to do with this sudden coziness between OPEC and hadge funds than anything else.


Tyler Durden's picture

A higher oil price is a logical prerequisite to a successful IPO.

It's all about the price

NoDebt's picture

Yeah, there's definitely multiple reasons for them to climb in bed with eachother.  I think they're only selling off something like 5% of ARAMCO on the first round, but that's still tens of billions of dollars.  The price of those shares being directly dependent on not just on then-current oil prices but also on the EXPECATIONS of the price of oil moving forward.  They're going to have to keep these balls in the air for a long time through this process.  

daveO's picture

The selling off of/takeover of SA's assets, silver lining of the FED's easy-money created, unintentional 'Shale Revolution'.

buzzsaw99's picture

this ties in with keeping stock prices artificially high in several ways. first, with oil prices lower the ksa has been borrowing money and IPOing their shit rather than sell assets to finance their kingdom. second, high prices, and insane IPO successes fuel the fever. of course this is all a screw job imo because that IPO is a ripoff for several reasons which everyone here can probably deduce my reasoning on that.

The Wizard's picture

Don't these capitalistic free markets work great? How do they factor these manipulations into the economic models?

Youri Carma's picture

Statoil CEO Says Break-Even Cost Down to $30 Per Barrel
Mar 6, 2017 Bloomberg

Eldar Saetre, president and chief executive officer at Statoil, discusses the market impact of OPEC's output cut, his company’s positions in the U.S., and the decline in their break-even costs.

Yen Cross's picture

What about the HUUGE. SPR selloff?

buzzsaw99's picture

you know i was wondering about that. what a terrible time with storage capacity like it is. the only thing i can figure is that the spr is having storage issues, leaks perhaps? there seems to be a lot of leaking going on in the gubbermint these days.

NoWayJose's picture

Of course - OPEC tells hedge funds it will announce 'cuts' in production - tomorrow - so buy oil futures!

cn13's picture

Spot crude has traded in a $4 range since early-December.

I have never seen this before.  Record high U.S. stocks and gasoline.  Low gasoline demand.  Nothing matters.

The market is definately rigged.

For now.

A. Boaty's picture

Even with no OPEC cheating, it will take years for their stated production quotas to work thru the petroleum in storage. Keep an eye on:

1. OPEC cheating

2. Market manipulation. The Trading Masters like a very narrow range, and will keep it there if they can.

3. Governments subsidising petroleum products with $ hundreds of billions in market distorting stupidity.

4. Demand destruction.

Long storage tanks and oil tankers.

DrZipp's picture

The snakes meeting with the pigs.

trouba z ceska's picture

Towelhead men are getting better and better