Oil prices have sold off sharply in the wake of Friday’s non-event Opec meeting, underlining the producer group’s credibility problem. By early evening UAE time yesterday, world benchmark North Sea Brent crude oil futures were down 11 per cent since Friday afternoon, at US$39.93 per barrel – 83 cents lower on the day.
Why the big sell-off when there was essentially no new information out of the meeting?
The major players within Opec, especially Saudi Arabia, had given no indication that there would be a shift in policy from last year, when the group resolved to hold on to market share and let the market find its own level, a strategy aimed at forcing off high-cost production from North America, the North Sea and elsewhere.
The main difficulty – and not just for the latest sell-off – seems to be Opec’s inability to put out a clear message.
As Ann-Louise Hittle, senior oil analyst with Wood Mackenzie, explains: “Rumours of possible production cuts and even an increase in the ceiling flew through the Opec rumour mill ahead of the Friday afternoon press conference. That part was great political theatre and reflected the disagreements in the group.” But instead of any action, she says, “a vaguely worded communique was released and a short press conference held”.
That communique mostly delivered tedious housekeeping information and the already well-known fact that Indonesia would be rejoining the group, without any discussion of how its or any other member’s production would be accommodated.
In later paragraphs, there were some throwaway comments about a world demand growth forecast of 1.3 million barrels per day for next year while non-Opec supply “is expected to contract” (by an unspecified amount).
This vacuum was filled by comments from individual oil ministers, especially Iranian oil minister Bijan Zanganeh, whose interpretation of the meeting – “Everyone does whatever they want” – helped to fuel headlines like “Opec talks end in chaos” and “Who killed Opec?”.
The Vienna-based secretariat is certainly aware of its communication problem. According to a story in The Wall Street Journal in October, internal reports by Opec determined that it had “an image problem” and difficulty communicating its core message of stability.
But the problem is more fundamental as Opec for at least a decade and a half has become increasingly riven by disagreements, conflicting goals and accusations of cheating, with Saudi Arabia the only member with significant spare capacity for most of that period.
There is no clear Opec message to deliver. There is Saudi Arabia’s policy – backed by its closest allies in the Arabian Gulf – of defending market share and forcing those with the highest marginal cost of production to be the first to cut, rather than the lowest-cost producers.
Has that policy been working?
The growth in North American production has been reversed and there have been nearly $300 billion of development projects cancelled to date. But the momentum in the world’s largest industry takes a long time to get back into balance.
“This is a problem unlikely to go away any time soon,” says Amrita Sen, senior analyst at Energy Aspects. “Opec’s meeting ended in no output cuts as expected but the fact they could not even agree on a collective quota ahead of Iran’s return shows the huge gaps that exist between members. So balances remain the same, Opec countries will continue to pump as much as possible for now [and] the crude market remains oversupplied.”
Ms Hittle agrees: “It is going to be a long slog until the second half next year with the oil market facing rising Iranian oil output.” But there is a ray of optimism, she says: “One difference with the first half of this year is US oil output is slipping into a year-on-year decline … and that could provide somewhat of a floor for oil prices as the market contends with the ongoing oversupply.”