Opec: Nothing to see, move along now

Front month Brent had already run up from a close of $42.47/bl on 24 August to an open of $49.41/bl yesterday before spiking at $53.79/bl after the release of Opec’s monthly bulletin, interpreted by some as an indication that the tanker is starting a slow turn away from the market share maximisation strategy. But it’s the demand side rather than the supply side that is turning the market. The recent oil rally kicked off on 27 August, when US government data revised up US GDP growth by 1.4 percentage points to an annual rate of 3.7pc in the second quarter. And Opec’s words on demand rather than supply are the interesting ones. Oil demand will be “boosted by the OECD Americas and Europe”, says the commentary in the Opec bulletin.

Agreed, you have to read between the lines in Opec statements. Indeed it’s often like reading the future in tea leaves. The problem, of course, is that any comment on the market from Opec has to not offend members with disparate views on current and future strategy and festering resentments about the sway of Riyadh, while sending messages to external players be they producer companies and non-Opec producer countries, consumer country governments, or the bogeyman “speculator”.

So, with Algeria and Venezuela among others noisily complaining about the pain low prices is causing them and demanding — more to placate a domestic audience than in real hope of success —co-ordination with major non-Opec producers, it was incumbent on the secretariat officials who drafted the editorial of the bulletin, to say that Opec “stands ready to talk to all other producers”. Equally, it was incumbent on them to reiterate the position that Saudi Arabia has held to since November last year, Opec will not cut alone. As the editorial said, “It has to be a level playing field”. That means the likes of Russia, Brazil and Mexico must cut too. When Saudi oil minister Ali Naimi said that last year he did so with his tongue in his cheek, knowing there was not a cat in hell’s chance of it happening. And so it remains. Russian deputy prime minister Arkadiy Dvorkovich has maintained the politesse, saying that Moscow stands ready to continue consultations with Opec on stabilisation of international oil prices. And he went on to say that low prices mean Russian production will not grow and might even contract slightly. That is not even a hint of a possible volte face on previous refusals to enter into a producer alliance with Opec. Anybody want to put a bet on Brazil or Mexico agreeing to cut? And that’s even if Iran would agree to forego the benefits of sanctions relief or Iraq would return to the fold of production constraint.

True the bulletin piece leads on “growing fears that, under the current low-price scenario, investment in future capacity additions will continue to be shelved” and failure to invest now could provoke future price spikes. But you need rose coloured spectacles to think this is an indication that strategy is about to change.

Indeed, the bulk of the editorial is a justification of the key conclusion that, “it is just a case of riding out the storm and waiting for calmer waters to return”. Demand projections from the IEA and EIA as well as Opec itself point to demand growth that “would also serve to gradually reduce the imbalance in oil supply and demand fundamentals” … “This augurs well for oil prices and should play a big role in helping to restore market stability”.

To see this editorial as anything other than a reiteration of standing policy is to clutch at straws.

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