Thursday, September 22, 2016

Is OPEC All Talk?

Venezuelan President Nicolás Maduro said earlier this week that the world’s big oil producers were close to clinching an output deal. But many traders and analysts took that with a large grain of salt.

Venezuelan President Nicolás Maduro said earlier this week that the world’s big oil producers were close to clinching an output deal. But many traders and analysts took that with a large grain of salt. Photo: Agence France-Presse/Getty Images

LONDON—A now-familiar pattern ensued Monday after Venezuelan President Nicolás Maduro said the world’s big oil producers were close to clinching an output deal—oil prices rose more than 1% early that day, and then quickly fell, posting losses by Tuesday.

It was among the most recent in a series of optimistic assessments about a potential deal by members of the Organization of the Petroleum Exporting Countries. But oil traders and analysts increasingly see the statements as an OPEC ploy to prop up prices short term.

“You have to take it seriously when big producers talk of production cuts, so that’s why prices shoot up initially,” said Rob Thummel, portfolio manager at Tortoise Capital Advisors, which manages $15 billion in energy assets. “But investors quickly realize that this is just talk and no action and those rallies fizzle out quickly.”

Few analysts and investors believe OPEC will come to a meaningful agreement in Algiers when they hold informal talks on Wednesday afternoon on the sidelines of the International Energy Forum. Some OPEC officials say Mr. Maduro and others are issuing statements simply to keep a floor under prices, which sunk to less than $28 a barrel this year and have remained stubbornly under $50 a barrel.

"OPEC has to do that to make sure prices don’t fall to a certain level or rise to a certain level they don’t like and recently we have seen a lot of that,“ said a senior OPEC official who believes a deal will eventually happen. “OPEC has to talk and talk.”

The strategy of talking up prices is arguably the last arrow in OPEC’s quiver. The cartel once saw its role as an oil-price maker, able to swing the market up or down by regulating its own production to match global demand. But an American oil boom made OPEC’s production less relevant to prices, and OPEC members like Saudi Arabia are now instead competing fiercely to maintain their share of the market by pumping full tilt.

Internal divisions such as the geopolitical rivalry for power in the Middle East between Saudi Arabia and Iran have made reaching a consensus difficult. The cartel has failed to take any action to pump up the oil market at three formal meetings since prices began sliding in 2014, and an attempt to launch a so-called production freeze in conjunction with Russia fell apart in April when Saudi Arabia walked away because Iran refused to participate.

Without the ability to influence the physical supply side of the oil market, OPEC has few options to boost stagnant oil prices that are far below the $100 a barrel that members like Venezuela need to balance their national budgets. Oil-price bounces provide short-term cash injections for OPEC members, and their statements about oil-output cooperation show domestic audiences they are trying to do something about oil prices.

Oil prices had fallen below $42 a barrel in early August to a four-month low when reports surfaced that OPEC members were holding renewed discussions about a production freeze, with talks to be held in Algiers in late September. Prices immediately went on a tear, entering bull market territory and breaking $50 a barrel last month.

Prices have since fallen back, with Brent crude, the international benchmark, trading at $47.64 a barrel. Some OPEC members said that even if there isn’t a deal, their words have had an effect.

“Prices have risen by $5 a barrel after news of the Algiers meeting surfaced,” said a delegate planning to attend the talks in Algiers. “So it’s already having a positive impact.” 
The routine has left OPEC members’ credibility in tatters with some market participants.

“It baffles me that people still take those statements seriously,” said Tom Pugh, a commodities analyst at Capital Economics. “There’s never any detail, never any confirmation and it’s always the same characters.”

Michael Nielsen, oil trader at Global Risk Management, said much of the initial price reaction is due to trading algorithms, which are preprogrammed to buy or sell depending on keywords in news headlines. When human traders later take the wheel, the rally often quickly dissipates.

Another reason why the OPEC strategy works—even if just for a few hours or days—is that investors often buy up the talk on the expectations that others will do, too.

After Saudi Arabia’s energy minister pledged to “take any action to help” the oil market last month, speculative investors piled in. Net long positions in Brent crude—or bets that prices will rise—held by hedge funds and other big money managers jumped by 22% during the week after the statement, according to data from the Intercontinental Exchange Inc.
“When those headlines come out, many react instantly as they don’t want to be caught on the wrong leg,” Mr. Nielsen said.

Write to Georgi Kantchev at, Summer Said at and Benoit Faucon at

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