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 georgi.kantchev@wsj.com, Summer Said at summer.said@wsj.com and Benoit Faucon at benoit.faucon@wsj.com
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