Wednesday’s Opec meeting may have resulted in a no-change decision on production targets, but as more and more people are noticing, its importance lay elsewhere — in signalling some significant turmoil within the organisation itself.
Indeed, if ever proof was needed that Opec may be turning into an outdated institution for today’s commodity markets, Wednesday’s meeting could very possibly have been it.
Saudi oil minister Ali Naimi, was famously quoted calling it “one of the worst meetings we have ever had.”
Needless to say, the analyst community is having a blast trying to interpret the significance of it all.
First to sum things up, here’s JBC Energy:
The lack of consensus in OPEC at its 159th Ministerial Conference yesterday in Vienna shows that there is no longer an agreement in place to maintain the price range of between USD 70 and 90, implying that expectations of rising oil prices are a reasonable assumption. When HE minister Naimi was asked about the price expectation he declined to give an outlook but made clear that the USD 70-80 price range referred to outdated numbers. This tells us that the debate must now be centred around the USD 100+ level.
Oil demand is expected to rise by 1.5 mbpd in Q3 and there is little doubt that the required barrels will be supplied. However, it is as usual, market expectation that will drive prices and not actual supply and demand. OPEC’s inability to agree on an output hike means that there is no agreement on the previous target price or a new consensus price target, thus the market has to assume that OPEC, or at least some members, want to see prices in excess of USD 100+.
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The disagreement within OPEC puts the organisation on elevated levels of stress. An organisation like OPEC is only as good as the discipline of its member countries in standing by its decisions. Historically, most cuts by OPEC were shouldered by Saudi Arabia and its GCC allies. These core players within OPEC are the only producing countries who really have spare capacity and are ready to adhere to a joint policy. The other producers largely pump as much as they can and increasingly do so when prices are high. Before this meeting started it was already clear that OPEC ministers would have to talk strategy. However, it is too early to conclude whether this was a temporary blip in the cohesion of the organisation or whether OPEC will have to re-invent itself to stay relevant.
Olivier Jakob at Petromatrix, meanwhile, reflects upon how historic the failure of the meeting was, ponders the possible production outcomes and wonders if a significant shift in the power structure has actually occurred:
The first OPEC meetings we covered were still being held at the Intercontinental hotel in Geneva and that was many, many years ago and we have no memories of one OPEC meeting terminating like the one of yesterday. There were meetings where OPEC could not come to an agreement on a change of policy, meetings where the wishes of Saudi Arabia where not met but we don’t recall a meeting that just split-up, without even an agreement on a communiqué and followed by all sorts of name calling.
Iran played hardball and tried to move the decision to a month or two from now at an emergency meeting to be held in Teheran. We need to keep in mind that Ahmadinejad wanted to go to Vienna to attend the OPEC meeting as the caretaker of the oil ministry. He was not allowed to do so and with Iran blocking everything and trying to delay the OPEC decision to an emergency meeting, guess what?...Instead of Ahmadinejad going to OPEC in Vienna, it would be OPEC coming to Ahmadinejad in Teheran.
Saudi Arabia and the other GCC countries however did not seem to like that proposal very much and everybody parted their own way in a very un-usual manner. Saudi Arabia and the GCC countries gave clear signals after the historic failed meeting that they would go on with their plan to increase production.
One thing that was clear from the post-meeting declarations is that the proposed increased of quota was not purely an exercise of legitimizing the current production levels but of increasing the real supply to an OPEC total of 30.3 myn b/d which would have prevented a stock draw in the third quarter (IEA has the OPEC Call-On-OPEC in the third quarter at 30.1 myn b/d).
The increase would come mainly from Saudi Arabia and matches the Saudi production level of about 9.6 myn b/d which has been indicated by various sources. Saudi Arabia now has no choice but to stay to its current program of increasing supplies especially after its post-meeting statements. If it does not, then it means that the new powerhouse in OPEC is Iran and we do not think that Saudi Arabia or more broadly the GCC countries are ready to accept that. The GCC countries can withstand much lower prices than Iran, hence a power struggle for the leadership of OPEC is not necessarily price-supportive.
As to the bigger picture, and how the failure fits into what’s going on on a macro level, here are some very perceptive thoughts from Marc Ostwald at Monument Securities (our emphasis):
a) The interests of the individual member countries have diverged very significantly, we know that Algeria, Venezuela, Iraq were against an increase, the suspicion would be that Iran, Angola and probably Nigeria were other objectors, and it has been suggested that only the GCC countries voted for an increase. OPEC is thus on the point of break-up, and the biggest beneficiaries may well prove to be mother Russia and Kazakhstan.
b) The objectors have one very common theme, they are using FX reserves from oil revenues to subsidize, i.e. counteract, in most cases imported food price inflation to avoid the fate of Egypt and Tunisia. Thus offering even further support for the Bini Smaghi doctrine that “For central banks around the world, …core inflation is no longer a very useful indicator for monetary policy, and should probably be abandoned.”
c) In some cases they would also struggle to up production, most notably Iran, or need a lot more investment to up output (Algeria, Angola, Iraq, Nigeria, Venezuela) and in all cases, they have absolutely no desire to help the USA in any shape or form.
d) A broader perspective is that the post World War II world order is fracturing in a spectacular fashion, be it the EU/Eurozone, the World Bank/IMF, OPEC, the illusion of unity at the G20 – largely a temporary grouping with few, if any, common interests. A new world order beckons, doubtless preceded by disorder, all we now need to admit is that the western financial system is as insolvent in balance sheet terms as it was in 2007/2008, and that QE has been an ‘Emperor’s new clothes” exercise.
Olivier Jakob joked earlier this week that all we need now is for Ben Bernanke and the Fed to start intervening in the oil market directly — by selling oil futures in order to control inflation.
Though, it makes sense if they were joined in the task by fellow inflation-sensitive countries via a new incarnation of the never-realised Organisation of Petroleum Importing Countries (OPIC).
Now that really would be re-inventing Opec.
Related links:
The Saudi capacity puzzle – FT Alphaville
Oil shock 2.0 - FT Alphaville
It’s not a liquidity crisis, it’s an energy crisis stupid – FT Alphaville