The roller coaster ride called OPEC

OPEC's crude oil market interventions over the past three to four years have caused oil prices to make significant swings, reflecting the still present influence and clout of the cartel (and its allies).

As OPEC and its non-OPEC allies (headed by Russia) have gathered in Vienna this week, a few days of headlines and spins will culminate in today's ministerial meeting where decisions on continuation or adaption of policies will be finalized. Where three years ago the cartel decided to produce and export crude oil flat-out, driving oil prices into a crash in an attempt to corner the then nascent US shale oil growth, since then much has changed. The decision then came as a surprise to markets and injected massive uncertainty and volatility into a market that has always been dominated by shocks already. Even though OPEC has shifted its strategy and has left the goal of wiping out shale, uncertainty remains and will likely persist. Interventions over the past years have sent oil prices on a roller coaster ride and will continue to do so in the future. The idea of the cartel, as influential as it is, managing oil prices in a US dollar 10 range by manipulating fundamentals will prove to remain wishful thinking.

Starting at the beginning of 2017, OPEC joined by non-OPEC headed by Russia have cut production of crude oil by 1.8 million barrels per day (or 2% of global supply). Despite some members not performing to the fullest extent, overall compliance has been – untypically – high in 2017 reducing the overhang of massive global oil and oil products inventories built up over the year before. Prices have steadily increased although partly driven by massive building of speculative long positioning. While the goal of driving inventories down to 5-year averages has only partly been attained, CAPEX has also been cut significantly across the industry for 2 years straight, setting the market up for potential tightness in 2-3 years from now. Developments gave OPEC greater control over the market in the longer term, but it realizes it was joined by a new swing producer called shale oil that due to some years of marginal prices and cash flow pressures have massively improved efficiency, cash cost control, capital discipline and hedging skills.

Against the backdrop of inventories still resting at levels only half way toward the long term averages and 2018 supply and demand balance models showing a likelihood of being broadly balanced only when production restrictions remain in place, OPEC will today decide on whether to roll over the policy for another period after the end of current deal in March 2018. Currently, the jury seems to be out for either a full 9 month extension to December 2018, a 6 month extension or a 9 month extension but with a review/opt-out after 3 months (so in June 2018). It all seems to lack conviction on a credible exit strategy and members but especially Russian oil companies remain worried about the resurgence of shale and loss of market share if prices go to high.

Market participants (many of which speculators and investors) are closely watching today's ever move and have likely fully priced in a 9 month extension. Any under delivery to just that may prompt a wave of disappointment selling and a sharp correction in prices. Even confirming the expected may constitute a typical case of ‘buy the rumor, sell the fact'. However, let's not forget about OPEC's past track record of surprising on the hawkish side and rule out another leg of the bull run. Check your risk positions and make sure your hedges are up to date. Roller coaster ride it is.

Robbert Marneffe
Robbert Marneffe
Commodity Consultant