OPEC and oil prices: Sentiment is king

Time to reject oil's 'new normal'?
Time to reject oil's 'new normal'?   

I don't know what is worse: obsessing about Baker Hughes rig reports or the infatuation with the Organization of the Petroleum Exporting Countries' (OPEC) official stated production level?

Both measures are pored over by avid crude oil bugs and yet both are pretty inaccurate in terms of what is actually going on in underlying production levels.


Historical oil data experts will tell you that the rig count has called some of the big turns in U.S. production, and yet how many times in the last hundred years have we had a disruption like the shale oil revolution?

None of course. It's the fact that so many tiny shale operations have ridden the roller coaster and are now closing down due to the inefficiencies of small scale that have so skewed the picture.

Sentiment rules

Back to OPEC and the excitement over the official output level of 30 million barrels a day.

Too many times over the past decade I have stood outside the Secretariat in Vienna, first on Obere Donaustrasse and then Helferstorferstrasse, after a production decision, only to be confounded by the market moving on the back of it.

Why so much volatility when the real production levels haven't even moved?

The answer is -- as often as not -- about sentiment. And it's sentiment again at this June meeting of OPEC that is key.

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Unlike in November last year when, surprisingly for many, Saudi Arabia changed its historical strategy and led OPEC to leave production at 30 million barrels a day in order to face down higher-cost competitors, this time around, no-one will be surprised by a rollover of current levels.

That said, actual production is currently around 31 million barrels per day, so once again it would only be a justification of current output if OPEC was to actually hike, much to the annoyance of the likes of Venezuela and Nigeria who desperately need higher prices.

Remember 2008?

Looking back at the seven years since the start of the financial crisis, the two most interesting and high-impact years for OPEC were 2008 and 2011. Both saw huge oscillation in price and big moves in official production levels, so it's also worth taking a quick look at how the market traded on the back of them.

Firstly, back in 2008, OPEC and world oil markets were in turmoil. In July of that year, oil prices hit a peak of $147 per barrel and yet by December, oil had lost $100. OPEC cut aggressively three times that autumn and winter, reducing its target by a combined 4.2 million barrels.

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Ultimately these moves stabilized the market, but after the third cut what did the market do in the immediate aftermath? Prices fell over $3 to circa $40 a barrel.

So the immediate move failed stabilize the short-term crude market, but ultimately sowed the seeds for a move beyond the $70-80 level that then-OPEC-President, Chakib Khelil ,was hoping for.

Read MoreCrude is a 'coin flip' ahead of OPEC meeting: Technician

I think this shows that the knee-jerk reaction is very often just that. Fine for the short-term oil traders, but not a good indicator of long term ramifications.

Knee-jerk reaction

Spin forward to 2011 and in December of that year OPEC hiked its stated production level to 30 million barrels a day (which is the last time the grouping officially moved on this figure incidentally).

The point here is that OPEC didn't magically put another four or five million barrels on the table. It just told the market that it was now officially recognizing what it was already producing.

Read MoreSaudi oil minister 'not stressed' as OPEC meet looms

Once again the knee-jerk reaction was negative, with oil falling over $5 on the day to under $100 a barrel. It then stabilized -- and therein began the golden period for OPEC which lasted three years until the middle of last year when the $100-115 range burst in a spectacular fashion.

So when looking at the OPEC decisions, or indeed rig counts, it seems clear to me that the raw statistics and data can only take you a certain way down the road. It's as often as not about the mood music surrounding the decision than it is about the raw number itself.

-- by CNBC's Steve Sedgwick in Vienna. Follow him on Twitter @steve_sedgwick