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For how long can OPEC talk up oil prices?

By Julieanne Geiger - posted Thursday, 13 October 2016


When the size of the production cut—between 240,000 and 740,000 barrels per day—was announced, one could feel the weight of the disappointment within the industry overall. The analysts wanted more; wanted deeper. Most OPEC members had been scrambling to reach record high oil production leading up to the meeting, some successful. Given current production levels, the small cut was seen by most analysts as a mere token gesture that would do very little to address what most would agree is the reason behind the price "problem"—the global supply glut.

And further skepticism surfaced over the fact that no specific member had agreed to any specific cut—they just agreed that as a group, "they" would do some cutting—some months down the road—and that the "they" in that equation wouldn't be Iran. And it wouldn't be Nigeria. And it wouldn't be Libya.

And still, amid all this ambiguity and mystery, and with some distant promise to shave a mere 240,000 barrels of oil per day off OPEC's record production figures, oil climbed above $50 a barrel. Today, Brent is trading at $52.64, which is a 12-month high-a monumental swing on mere talk.

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And sure, some minor fundamentals have changed, such as five weeks of crude oil inventory draws in the U.S., but those inventory numbers are still way too high. In reality, OPEC hasn't actually done anything to ease the glut. They've just talked… about talking… two months from now. In fact, the only actions that OPEC has taken is to pump oil at record paces, adding to the glut, and hoping that speculators will lap up what they're dishing out in rhetoric. That's what OPEC is doing today.

So happy are the markets on this wispy nothingness, in fact, that some are suggesting the oil markets are poised for a major meltdown, as speculators buy up contracts that are equal to a year's worth of U.S. consumption—amounts that can't possibly be delivered and will be pushed off to next month's contracts or cancelled. To put this in perspective, there are 480 million barrels of oil on order for delivery in November to Cushing, Oklahoma—a facility that is capable of handling only 50 million per month.

What will also be pushed aside are some other cold, hard facts, such as Libya's production increases, or Iraq's, or Iran's, and how fundamentally, this means the remaining OPEC members would have to make deeper cuts to offset these increases and still meet the organization's promised cut. Deeper cuts that could hurt whichever member is tasked with taking on this burden.

But to keep the market's eye on the OPEC ball despite market saturation, the Algerian Energy Minister, desperate to save his country from an economic collapse, made yet another announcement on behalf of OPEC that the bloc would be willing to cut yet another 1% "if we need to" on top of the cuts proposed out of the meeting in Algiers, adding that there would be even more meetings forthcoming—the first of which will be in Istanbul on Oct 9-13, again, on the sidelines of another energy meeting, the World Energy Congress. But this time, the informal talks about the freeze will include non-OPEC Russia and non-OPEC Azerbaijan.

As Reuters reports, the meeting signals that OPEC "is more serious now about managing the global supply glut." Russia apparently doesn't share this perceived seriousness, with Russia's Energy Minister Alexander Novak saying on Friday that he doesn't expect to sign a deal with OPEC during this meeting. Just more talk.

And yet another meeting is scheduled in Vienna for October 28 and 29, according to OPEC sources, followed by a "long-term strategy" meeting on November 1-4, and a technical meeting again in Vienna on November 23 and 24, and possibly a follow-up meeting of the High Level Committee a day later on November 25. Finally, recommendations will be presented at the previously disclosed and much anticipated meeting on November 30.

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That's plenty of evenly spaced talk that is sure to keep OPEC in media headlines, and give the oil speculators something to play with until that time. After that, it's anyone's guess as to how long prices will hold, but it's likely that regardless of the outcome of the 30 November recommendation meeting, OPEC will continue to feed the beast with talk—and the market will readily accept the handout, even if it's in lieu of the fundamentals.

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This article was first published on OilPrice.com.



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About the Author

Julieanne Geiger writes for Oilprice.com.

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All articles by Julieanne Geiger

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