It’s no secret I’ve been one of the consistent naysayers about the OEPC deal. I was confident a deal wouldn’t be had, and that if they did manage to reach a deal—which seemed an impossibility given Iran/Saudi relations—it would have little to no effect on the supply glut. I was wrong on one account—they did manage to solidify a deal.
It’s important to note before we look at the cold, hard facts of the deal specifics that I’m a proponent of letting markets correct themselves, and as such, I found it disturbing that the world was expectant that OPEC needed to solve the world’s oil supply glut by essentially manipulating oil prices through a controlled production cut, but nonetheless, all eyes were on OPEC. “Solve the supply glut!” the world seemed to scream. This perplexed me.
What was also fascinating about the deal, which began in April and mercifully concluded yesterday, was the carefully planned and constant rhetoric, “leaks” from OPEC officials to the media, Russia’s personality-disordered flip-floppy comments about their willingness to join OPEC in cutting production, their efforts to ramp up production, and their apparent disagreement between Russia’s oil ministers and Putin himself. Markets went up and down depending on the headlines of the day, which were duplicitous and vague, and could be—and were—interpreted any number of ways. Markets see-sawed in response, and I’m sure many an investor reveled in the ensuing volatility.
Of course, no one cares what I think, and no one should care what the OPEC jawboning is from this point onward. Less talk, more action. And yesterday, they acted. Who knew? I will humbly eat my just portion of crow, although I may be eating it again in due time, because I still think it’s an extremely fast-moving shell game, with desperate countries who have almost their entire wellbeing tied up in oil willing to do whatever needs to be done to hold their head above water—everything, that is, except to cut production.
But much more important than what I think, or what OPEC members or Russia have to say about the matter, is the fact that there are numbers now. There are actual production figures, actual cut figures by country, and actual timeframes—today, we have details. What do these numbers mean, without the commentary or spin?
Let’s look at where OPEC was with production when the talks began at the April 17 meeting in Doha—a meeting that ended without resolution. First, the spot price for Brent was $41.32. The supply glut was looming large, and the markets were unhappy. The talks at that time, like this time, were aimed at a production cut—but it failed. Here’s what they were producing on average in the first quarter 2016, the quarter leading up to the Doha meeting when everyone was panicking about the glut and crying over the low prices.
On average in Q1 2016, per secondary sources, OPEC was producing 32.5 million barrels per day. A couple of weeks later, they met to discuss a cut. They failed—or so everyone thought. In the months that followed, whilst jawboning and posturing relentlessly about how they would make it happen, they ramped up production (collectively), to 33.6 million barrels per day. Then yesterday, they agreed to “cut” this figure for production to… wait for it… 32.5 million barrels per day—exactly where they were before Doha, when everyone was calling for OPEC to cut. Brilliant move on OPEC’s part.
The markets cheered! Prices rose! Brent spot prices today, with only a promise of a return to previously unacceptable production levels a month from now, is $50.47 per barrel. That’s a remarkable increase for steady-as-she-goes production—almost $9 per barrel! Not to mention that the deal only holds production at this level—a level that was far too high in April—for six months.
The numbers don’t lie, and what really happened was nothing. We are right back where we started. OPEC is producing exactly what they were when everyone was badgering them to slow their roll. But now the narrative has changed. The bar or expectation has changed over the last few months, and now everyone is suddenly pacified with a return to pre-Doha levels. OPEC did what they needed to do: change the sentiment, not the fundamentals.
Now, for individual OPEC members, the distribution of the cuts is interesting. Saudi Arabia, who was taking a hardline throughout the whole process, said repeatedly that they wouldn’t bear the brunt of the cuts unless Iran joined, is seemingly taking the brunt of the cuts if you were to match the figures from yesterday to October production. But that’s not the case if you look at pre-Doha figures. In Q1 2016, Saudi Arabia was producing 10.147 million barrels per day. The cut agreed to would have them cut back to 10.058 million barrels per day, or a 0.9 percent cut. So while Saudi Arabia is one of the members to cut (although collectively it’s not really a “cut”), they are indeed cutting a small percentage. But since this is a zero sum game, another member must be ramping up.
The biggest winners just so happen to be some of the biggest producers, with UAE, Iraq, and Iran—three of the four largest OPEC producers—actually increasing production from the pre-Doha era. Win. Indonesia, although they are operating outside of OPEC now with a frozen OPEC membership, are producing more than pre-Doha levels as well, at 722,000 barrels per day. Win. Libya and Nigeria are also exempt from the cuts and will be ramping up as they are able. Win.
Meanwhile, Venezuela, who has been one of the OPEC cut’s loudest champions, is actually taking a huge 13 percent cut, as is tiny-producer Gabon. Qatar is also taking a hefty cut at over 7 percent.
So while the overall OPEC production figures will not change from pre-Doha to now, the distribution of production within the group is shifting.
Regardless of this internal shakeup, before we get too excited about the production cuts from yesterday, it should be noted that this meeting was the same exact result that came out of the failed Doha meeting—production is stagnate. No cuts have been proposed or agreed to. But while Doha was viewed as a failure, yesterday’s meeting in Vienna is viewed as a success. And in some ways, I guess you can say it was. Success in pulling up markets, despite the supply fundamentals staying the same.
By Julianne Geiger for Oilprice.com
