In the midst of a week of bad to terrible news for oil prices, OPEC tried to alleviate concerns that its meeting this November will, in fact, produce a meaningful deal on production cuts.
“We remain deeply optimistic about the possibility that the Algiers agreement will be complemented by precise, decisive action among all producers,” announced OPEC via its regular publication, “
The September announcement helped push prices past $50 for over a week, before they plunged back down to $44 this week. The decline was largely attributed to
At this point, with an imminent OPEC meeting and consistently weak fundamentals, serious investors need to ask themselves: why trust OPEC? Why place any confidence in its ability to manage production or influence the market to send prices in positive directions?
First, the basics: OPEC accounts for just over 40 percent of global production, with the bulk of production coming from its
The Saudi effort, as
This campaign ended recently with the Saudi decision to push for a production freeze in September. But the announcement in September, which was essentially a promise that a deal would be reached even if no one knew how, immediately triggered dissent within the ranks of OPECs non-Saudi members. Specifically, it’s other
Iran has pushed for an exemption from production limits, arguing that it has yet to recover from the sanctions that were lifted in January. Iran’s oil minister Bijan Zanganeh had previously declared Iran’s intended target was 4 million bpd, but in October Iran announced it hoped to pump as much as 4.28 million bpd of crude and 1 million bpd of condensate within four years,
And what of the Iraqis? OPEC’s second-biggest producer has been disputing official OPEC figures, arguing that its production level is being
This situation has become more complicated however, as the independent Kurdish region of northern Iraq, itself a significant oil producer, has
This throws the whole question of oil production figures into question. OPEC estimates Iraqi production at 4.4 million bpd, while Iraq has claimed it produces 4.7 million bpd, a figure which the Kurds have now revealed to be false.
Disagreements over OPEC’s figures and domestic figures have been a stable of OPECs internal politics, going back to the 1980s. But this current dispute is particularly important, as Saudi Arabia will need Iraq’s tacit approval of a production freeze to give it the necessary legitimacy. Exemptions have already been granted to Nigeria and Libya; without Iraq and Iran, cuts from Saudi Arabia and other members wouldn’t make a dent in the global supply-demand balance.
So again, the question is: why should investors take OPEC seriously? When its internal politics have become so disruptive, when its ability to influence the market and global production in meaningful ways appears so limited, and when its chief members threaten to increase production before implementing a freeze, are there compelling reasons for serious market watchers to give the world’s
If a production freeze is reached on November 30, it will be a small miracle and could send prices back up above $50. But it is likely the criticisms of OPEC and doubts about its continued relevance will only grow.
By Gregory Brew for Oilprice.com
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