Traders Test OPEC 'Whatever It Takes' Resolve To Defend Oil Price

Traders Test OPEC 'Whatever It Takes' Resolve To Defend Oil Price
When OPEC leader Saudi Arabia pledged in May to do 'whatever it takes' to defend world oil prices, it didn't expect the market to be testing its resolve just one month later.

Reuters

SINGAPORE/LONDON, June 22 (Reuters) - When OPEC leader Saudi Arabia pledged in May to do "whatever it takes" to defend world oil prices, it didn't expect the market to be testing its resolve just one month later.

As the Organization of the Petroleum Exporting Countries extended oil production cuts, oil prices fell 18 percent in just 20 days. OPEC members appear determined not to rush into deeper output curbs despite market pressure.

Oil traders have chosen to ignore bullish news for prices - including a long-awaited decline in U.S. oil stocks on Wednesday - and focused instead on negative factors such as a stubborn global glut.

As a result, the oil market posted its worst performance in the first six months in two decades effectively signalling its refusal to accept the effectiveness of the OPEC statement and its desire for further production cuts.

The "whatever it takes" pledge was made by Saudi Energy Minister Khalid al Falih at a meeting in Kuala Lumpur in early May, echoing a promise by European central banker Mario Draghi five years ago during his successful fight to defend the euro.

"You cannot fight the Federal Reserve but you can fight OPEC," said Bob McNally, President of the Rapidan Group, a Washington-based energy market and policy consultant. "Somebody at OPEC has to cut further but no one is willing."

The oil price decline and Saudi's ability to defend prices also puts in the spotlight Saudi Arabia's future king, 31-year-old Prince Mohammed bin Salman, who on Wednesday was made next in line to the throne by his father King Salman.

Prince Mohammed has been the ultimate Saudi energy decision-maker in the last two years and his strategy has shifted from orders to raise oil production to defend OPEC market share to curbing output to prop up prices.

Waiting It Out

Falih and other OPEC ministers and officials have said the cartel would not rush to deepen production cuts from the current four percent to arrest the price decline.

They said the group would rather wait until existing joint cuts with non-OPEC Russia finally result in a global stocks decline during the third quarter when demand for crude oil is usually strong.

OPEC and Russian sources also told Reuters there were few signs the group is preparing any extraordinary action ahead of a joint ministerial monitoring committee meeting in Russia at the end of July.

"We are in discussions with OPEC members to prepare ourselves for a new decision," Iranian Oil Minister Bijan Zanganeh said on Wednesday. "But making decisions in this organisation is very difficult because any decision will mean production cuts for the members," he added.

An oil price surge at the end of the last decade and the start of this one spurred multiple oil production projects around the world, including from U.S. shale formations, resulting in global oversupply which sent prices tumbling from $120 per barrel in 2014 to below $30 per barrel last year.

OPEC and Russia tried to stabilise prices with cuts at around $50-$60 per barrel, but this week Brent prices fell towards $44 per barrel on persistent oversupply worries.


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thomas  |  June 26, 2017
OPEC is the only cartel that is allowed in the capitalist system to fix price but they seem dumb at using their opportunity, and instead allow the greedy Wall street or London (mercantile exchange) traders that have nothing to do with the physical oil to dictate oil price at which the people who actually sell or buy the physical commodity have to abide by. OPEC, if Smart, have two options: Option #1: They can decide a price and have all OPEC members sell their oil at the price they all agree to (say $60). They can do this and take away the control from greedy investors who drive price up or down for their own gain. OPEC controls about 40% of global supply, if they fix their price, buyers would be forced to buy because they have no choice. Consuming countries cannot wait to get supplies from limited non-OPEC countries (who are all already pumping their maximum possible) and have their energy and transportation grind to a halt, waiting for their turn to receive oil supply at the lower price determined by wall street. I bet that Russia will join to sell at same price fixed by OPEC members (or very close to it)and the rest of the poor producing countries would join in to sell at same price also and that will eventually result to the death of price determination/manipulation by wall street traders. Option #2: OPEC can decide to cut production by say a huge amount, say 8M bbl/day, a gap which will be impossible for US shale producers to fill in many years. By doing this, they will drive oil price above $100 (and rising) immediately. They will make more than double or triple their current revenue while lowering the depletion of their oil reserves - which will be a win-win for all OPEC members (much higher revenue with lower reserve depletion). By cutting so deep, it will take US shale producers many years to replenish 8M bbl/day and before they can get to the point of replenishing it, shale reserves would have dwindled so much if not totally exhausted and OPEC will have full control of oil price like never before.