Monday, 10 Dec 2018

The suspense kills the OPEC

We all did this mortifying thing where you build too much history and that the best anecdote has never managed to do. OPEC did not just do that Thursday, it doubled. After one of the longest meetings in years, the group of oil exporters emerged without an agreement on a reduction in supply. He now has another chance to seduce the market on Friday after a larger meeting including non-OPEC partners such as Russia.

While the oil market is already in need of a wow factor as we approach the first meeting, this fatal blow to the pot every 24 hours means one thing: OPEC will need a bigger wow. The catch? Even if it were successful, it would eventually go against that.

The recent fall in oil prices is forcing OPEC and its friends to remove the barrels from the market. Saudi Arabia and Russia have increased production due to US waivers of sanctions imposed by Iran and increasing concern over trade, economic growth and, as a result, demand for oil . Meanwhile, the Permian Basin continues to make its best impression of a perpetual pumping machine. According to OPEC's own forecasts, from its latest monthly report, a supply shortfall of about 40,000 barrels a day this year was poised to release a surplus of nearly 1.5 million barrels a day in 2019, much of which was in the forefront.

The OPEC was agreed to cut a million barrels a day, thereby persuading Russia, Mexico, Oman and others to also cut back. However, this would imply that non-OPEC partners need to align with the reductions promised two years ago – and stick to them – simply to balance the market (and to assume that the Iranian sanctions be more severe). Given that for some countries, such as Mexico, the natural decline has been presented as a discipline, and Russia's apparent ambivalence in the face of rising oil prices, although it seems difficult.

Such calculations could explain why it was so difficult to agree Thursday on a public position and why so much can now rest on the persuasion of partners – read: Russia – to save something on Friday. Whatever the exact manipulations, it reinforces the feeling that the wheels come off.

The table below illustrates the rundown nature of all this. Until the end of October, the initial members of OPEC bound by the cuts agreed at the end of 2016 had held about 940 million barrels of market, or about 1.4 million barrels a day, more than promised. But look how they got there:

It should be noted that 40% of the reductions were made by only two countries, Venezuela and Angola, more than Saudi Arabia, even though its output at the end of 2016 was almost triple its combined total. Much of the "discipline" shown to date is simply a collapse.

As shown by Qatar's decision to leave OPEC, this organization is increasingly an exposure to two countries, Saudi Arabia and non-member Russia. And they are trying to gather a motley collection of small producers while calming the American president and finding ways to coexist with the seemingly irrepressible sector of the country's exploration and production. However, even success on this front implies the cost of increased production from its competitors, particularly in North America. Rather than OPEC-plus, it all looks more like a division of OPEC.

Thursday's non-protracted event came on a day when stock markets around the world were back in the red. The OPEC calculation still takes into account oil demand growth of 1.2 million barrels a day next year. Even if an agreement emerges Friday, it is questionable whether this organization could survive the next recession, regardless of its situation.

To contact the author of this story: Liam Denning at

To contact the editor responsible for this story: Mark Gongloff at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a columnist for Bloomberg Opinion in the fields of energy, mining and commodities. Previously, he was editor of the Wall Street Journal's Heard on the Street column and wrote for the Lex column of the Financial Times. He was also an investment banker.

© 2018 Bloomberg L.P.


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