Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Bitcoin Price Wavers - 15th Jan 19
History Shows That “Disruptor Stocks” Will Make You the Most Money in a Bear Market - 15th Jan 19
What Will the Stock Market Do Around Earnings Season - 15th Jan 19
2018-2019 Pop Goes The Debt Bubble - 15th Jan 19
Are Global Stock Markets About To Rally 10 Percent? - 15th Jan 19
Here's something to make you money in 2019 - 15th Jan 19
Theresa May to Lose by Over 200 Votes as Remain MP's Plot Subverting Brexit - 15th Jan 19
Europe is Burning - 14th Jan 19
S&P 500 Bounces Off 2,600, Downward Reversal? - 14th Jan 19
Gold A Rally or a Bull Market? - 14th Jan 19
Gold Stocks, Dollar and Oil Cycle Moves to Profit from in 2019 - 14th Jan 19
How To Profit From The Death Of Las Vegas - 14th Jan 19
Real Reason for Land Rover Crisis is Poor Quality of Build - 14th Jan 19
Stock Market Looking Toppy! - 13th Jan 19
Liquidity, Money Supply, and Insolvency - 13th Jan 19
Top Ten Trends Lead to Gold Price - 13th Jan 19
Silver: A Long Term Perspective - 13th Jan 19
Trump's Impeachment? Watch the Stock Market - 12th Jan 19
Big Silver Move Foreshadowed as Industrial Panic Looms - 12th Jan 19
Gold GDXJ Upside Bests GDX - 12th Jan 19
Devastating Investment Losses Are Coming: What Is Your Advisor Doing About It? - 12th Jan 19
Things to do Before Choosing the Right Credit Card - 12th Jan 19
Japanese Yen Outlook In 2019 - 11th Jan 19
Yield curve suggests that US Recession is near: Trading Setups - 11th Jan 19
How Unrealistic Return Assumptions Are Ruining Your Stocks Portfolio - 10th Jan 19
What’s Next for the US Dollar, Gold, Stocks & Bonds? - 10th Jan 19
America's New Africa Strategy - 10th Jan 19
Gold Mine Production by Country - 10th Jan 19
Gold, Stocks and the Flattening Yield Curve - 10th Jan 19
Silver Price Trend Forecast Target for 2019 - 10th Jan 19
Silver Price Trend Forecast 2019 - 9th Jan 19
Did Strong December Payrolls Push Gold Prices Up? - 8th Jan 19
How to Spot A Tradable Stock Market Top? - 8th Jan 19
Why 90% of Traders Lose - 8th Jan 19
Breadth is Very Strong While Stocks are Surging. What’s Next for Stocks - 8th Jan 19
Half of Investment-Grade Bonds Are Just One Step from Junk Status - 7th Jan 19
Stocks Rallied Again, Still Just an Upward Correction? - 7th Jan 19
Gold Golden Long-Term Opportunity - 7th Jan 19

Market Oracle FREE Newsletter

Bitcoin Analysis and Trend Forecast 2019

For How Long Can OPEC Talk Up Oil Prices?

Commodities / Crude Oil Oct 11, 2016 - 05:38 PM GMT

By: OilPrice_Com

Commodities Not a day passes without OPEC making oil and gas headlines, and today is surely no exception. Seemingly in lockstep with OPEC, the market is once again pacified on the promise that changes to the global oil supply glut are a' comin'.

Yesterday, the Wall Street Journal quoted anonymous sources close to the matter who had it on good authority that the Saudi's were willing to cut "up to" 400,000 barrels per day (and that they had planned to do so all along, with or without an OPEC agreement). We can assume this figure is off August or September levels, which are near-record highs for the oil-rich country.


Of course, there are 400,000 different possible production cut figures included in this "up to 400,000" range—including a big fat zero—so fundamentally speaking, like so much of the OPEC speak, this could mean nothing.

But this isn’t the first time OPEC chatter or supposition or guesswork has moved markets, and it won’t be the last. Because, as Oilprice contributor Rakesh Upadhyay pointed out back in August, just a month before the freeze was announced, fundamentals aren’t what’s driving the oil market—speculation is. And nothing feeds speculators like OPEC.

As Upadhyay wrote, "Though most analysts agreed that a production freeze was not going to alter the fundamentals, prices rose sharply, with the hedge funds adding record long positions," as evidenced by the chart below, which shows what happened in February when OPEC cuts were on the table for Doha. Fundamentals didn't change—the glut wasn't easing—yet hedge funds and speculation on OPEC rumors drove up prices.



IMG URL: http://oilprice.com/images/tinymce/saap1.png

The hope quickly faded when the Doha meeting fell short of expectations, but prices continued to climb. Then, the market found new hope in the Vienna meeting. We then wondered—this time quite wistfully—if a freeze could… maybe, possibly… happen in that meeting over the summer, much in the same way one might hold onto hope that we might someday win the lotto. Our hopes were dashed yet again—but not before the market reflexively inched up again.

Soon after, Saudi comments, which indicated that a new spirit of cooperation among OPEC members might be taking shape, sending prices upward yet again. An unofficial meeting was announced. Algiers, they said. "Stabilize the market" they said (which can apparently be done with talk, rather than production cuts). Russia chimed in, vacillating between joining the "market stabilization" efforts and not. We asked ourselves, this time ever more cautiously, dare we hope again? Most thought not, but speculators threw caution to the wind, moving markets this way and that on almost a daily basis in response to every utterance regarding the freeze.

Then the announcement came that OPEC had reached a deal. The earth shook, moving markets again— this time by a large percentage—and this time backed up by a more tangible hope.

Meanwhile, the industry scrambled to make sense of what it all meant. How big would the cut be? Which members would do the cutting? How did Saudi Arabia and Iran reach any kind of consensus when they were worlds apart—on multiple fronts? And then there was the ultimate question that had every analyst from here to Venezuela furiously figuring and calculating and refiguring and recalculating: just how high could prices go?

Speculators continued to largely disregard the ins and outs of the deal, which were absent at the time, and we saw markets tick up happily in response.

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.

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.

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.

By Julianne Geiger for Oilprice.com

Link to original article: http://oilprice.com/Energy/Energy-General/For-How-Long-Can-OPEC-Talk-Up-Oil-Prices.html

© 2016 Copyright OilPrice.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

OilPrice.com Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules