Thursday, September 29, 2016

OPEC ‘Understanding’ Is Easily Misunderstood

Wednesday’s jolt in oil prices seems like an overreaction.


By Spencer Jakab
The Wall Street Journal
September 29, 2016

“You keep using that word. I do not think it means what you think it means.”

The much heralded meeting of oil producers in Algeria led to an “understanding” according to people familiar with the matter. But the jump of more than 5% in oil prices Wednesday, the best in nearly six months, seemed more like a misunderstanding. The day’s only fundamentally bullish development was a surprise drop in U.S. crude inventories in a weekly report from the U.S. Energy Information Administration.

The Organization of the Petroleum Exporting Countries didn’t agree to anything more than a set of parameters. True, the reported range of between 32.5 million and 33 million barrels a day is technically a cut, seems even better than the proposed freeze. But the can has been kicked to the next official OPEC meeting and, most important, the details of who will cut exports need to be worked out.

With Iran still seeing output rise back to its pre-sanctions level of around 4 million barrels a day and both Libya and Nigeria recovering from disruptions, the cartel’s output may be 1 million barrels above the suggested range. A million-barrel-a-day cut really would be meaningful, roughly eliminating excess production in one fell swoop. Who does the cutting is where it gets tricky.

With Saudi Arabia and Iran locked in a war for market share and, through proxies, actual wars in the region, neither is likely to make a unilateral gesture. Saudi Arabia normally has played the role of both swing producer and enforcer in the cartel, keeping some capacity in reserve. It typically sees output decline slightly in the winter, but if it counts that toward a reduction, then it would do nothing to alter the fundamental picture for crude. Would Iran undercut its return to the world market in response? Inconceivable.


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