Why OPEC Couldn't Move Oil Prices Higher

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

The latest OPEC meeting was uncharacteristically tranquil, with little of the eleventh hour infighting and arm-twisting that has been so prevalent in previous meetings. The cooperative spirit has allowed OPEC to roll over its production cuts for another nine months, as expected, a move that has to be described as a successful outcome. "Nine months with the same level of production that our member countries have been producing at is a very safe and almost certain option to do the trick,” Saudi energy minister Khalid al-Falih told reporters.

Yet the oil markets are unimpressed. Crude prices dropped on Thursday as it became apparent that a much more aggressive move – a lengthier extension or deeper supply cuts – was off the table. For OPEC, the price reaction is surely frustrating. Keeping so many oil producers on board with a plan that requires significant sacrifice has always been a monumental task, not least because many of the countries involved seriously distrust one another. More importantly, they are extending the cuts for another nine months, longer than anyone expected up until just a few weeks ago.

But oil traders are difficult to please. After Saudi Arabia and Russia signaled earlier this month that they had agreed to extend the cuts for nine months rather than six – a surprise announcement at the time – the oil markets essentially said, “Great. What else can you give me?” The nine-month extension became the baseline and was quickly incorporated into market assumptions. If OPEC had come away with anything less than a nine-month extension, prices would have plunged. So, the markets were a bit disappointed that OPEC only came away with nine months.

"It is a disappointment that OPEC hasn't done more to balance the markets," Olivier Jakob, energy markets analyst at Petromatrix, told CNBC. "A nine-month extension of the output cuts is already baked into prices. This shows there's not much more OPEC can do."

In that sense, OPEC is a victim of rising expectations and its own efforts to inspire confidence in the oil market. Amrita Sen, the top oil analyst at Energy Aspects, agreed. "I think the market now, given that they announced the nine months already a few weeks ago, is expecting something a little bit more, maybe deeper cuts, maybe at least keeping the door open possibly for more cuts if inventories don't fall," she said in a CNBC interview.

Indeed, there is still more work to do. Oil inventories in the OECD are still 300 million barrels above the five-year average, which is not all that much lower than they were when the initial six-month OPEC deal commenced in January. Although several notable energy watchers including the International Energy Agency and investment bank Goldman Sachs argue that the oil market is probably already in a supply deficit, most agree that it will take an extended period of time for inventories to come back down to average levels.

However, according to asset management company AB Bernstein, even if the market is in a deficit and inventories are in decline, the normalization process will stretch well into 2018. The firm says that if inventories declined by 1 million barrels per day, for example, it would take 11 months until stocks fell back to the five-year average. As a result, the OPEC nine-month extension was necessary and appropriate, but not a radical game changer that would spark a major oil price rally in the short run. JBC Energy offered a more pessimistic assessment, arguing for the OPEC cuts to be extended through the end of 2018 if the market is to reach some sort of balance.

OPEC is a bit more bullish, expecting this balance to be reached by the end of this year. Left unsaid is what happens after the deal expires in 2018 – some warn that the glut would simply return. If that appears to be the case at the end of the first quarter of 2018, OPEC might be forced to extend once again. “We have said we will do whatever it takes,” Saudi energy minister al-Falih said on the possibility of further action, channeling his inner-Mario Draghi.

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BritBob's picture

Falklands oil - worth a punt?

 

 Rockhopper CEO Sam Moody described this as “highly attractive” in the context of the current oil price. The estimated break-even price is US$45/bbl.
The partners have submitted an environmental impact statement and revised draft field development plan to the Falkland Islands government, and discussions are set to continue on a range of operational, fiscal, and regulatory matters.
They have also reached a settlement on an insurance claim relating to costs incurred on the Isobel Deep exploration well during the 2015/16 North Falkland basin exploration campaign. Value is US$90 million (after deductions) on a gross basis. (MercoPress 23.12.16)

What about the Argentinians?

Falklands – Territorial Waters: https://www.academia.edu/10574593/Falklands_Islands_Territorial_Waters

 

All hot air...

Pasadena Phil's picture

This isn't about "oil traders". This is about the 92% of oil futures contracts owned by speculators. I have a feeling those OPEC sovereign wealth funds are engaged in a war against those trying to drain the terrorist swamp by defunding it. Iran and the other terror-sponsoring states that have declared no changes to plans to increase production will continue to give oil away until the buyers shut them down.

We in the US will be energy independent so it will be up to everyone else to decide how they want to deal with this. The EU seems to believe that addressing global warming by returning to the 18th century is the way to go. Good luck with that!

Zepper's picture

Give me a fucking break. Oil should be less than $26 a barrel. We have a HUGE HUGE oil glut. Its not decreased over the last 6 months. And it wont over the next 9 months unless there is a HUGE supply crisis.

 

$26> barrel   where oil should be

>$50 barrel    where oil is after all the illegal manipulation of a commodity OPEC and                         friends

 

OPEC is doing exactly what they want, keep oil at just the right price to keep things going for them but to squeeze the shale, oil mud guys.  

ali-ali-al-qomfri's picture

how will the price rise with all that armor sitting on it?

i expect we'll see more countries up-grading their pocket knife collections.

 

gcjohns1971's picture

Looks like the montarigarchs and the petrolgarchs aren't getting along.

Europe has monetarigarchs.  They want supply from ME so they don't become Vlad's bitches.  They've shot their wad on ME War, Multicultural population replacement, and Globalism.

The US has Petrogarchs who kept gas high even as oil was low through bottlenecking refinement. Turns out "Peak Oil" was peak BS.   And a new way to get oil appeared.

But the US also has Monetarigarchs.   They're raising interest rates, hoping to kill off the populists and Petrogarchs naming on their gates.  The government, meanwhile, is as feckless as a 9-year-old who doesn't know whether to obey Mom or Dad while they are fighting...leading to policy whiplash.

MrBoompi's picture

OPEC has discovered the same thing those of us who own physical gold or silver have discovered.  The price of our physical asset is set in the paper market.