Market Insider

OPEC smoke and mirrors' may be all it needs to boost oil

Is OPEC irrelevant? Gartman weighs in
Is OPEC irrelevant? Gartman weighs in

Just the whiff of an OPEC meeting has driven oil prices higher, squeezed shorts in the futures market — and made further inaction by the cartel more likely.

But that hasn't stopped market chatter that the Organization of Petroleum Exporting Countries could revisit the idea of a production freeze when it meets informally on the sidelines of an energy conference in Algeria late next month.

Oil's recent dip back into the $30s per barrel may be enough to get some OPEC members to curb their bickering and consider joint action — if crude plummets again. But for now, analysts see the cartel just talking, with the more needy members pushing for relief through a freeze or other deal.

"They can change market sentiment by signaling they're going to be more engaged. They changed the conversation again. It's basically a little smoke and mirrors," said Helima Croft, RBC's head of commodity strategy.

After recovering from the winter's lows, oil plunged briefly back into bear market territory last week, and reports surfaced that the cartel plans to meet on the sidelines of an energy conference in Algeria in late September.

On Monday, OPEC President Mohammed bin Saleh al-Sada, Qatar's energy minister, confirmed that meeting, and oil rose nearly 3 percent. West Texas Intermediate settled lower Tuesday at $42.77 per barrel, ahead of API inventory data and as Russia showed no interest in meeting with OPEC.

Analysts said what might make OPEC members discuss action is another steep drop in prices, which some expect to see in the next two months as U.S. refiners pare back operations for seasonal maintenance.

"OPEC signaled that they're waiting in the wings and they confirmed the floor by changing the conversation," said Croft. "There are a lot of shorts. We exceeded the February short position last week. They can accelerate the short covering rally. They're a catalyst."

Croft said she believes the market has been coming into balance. "Our view is the market is oversold at this point," she said.

In fact, OPEC in announcing the meeting said it sees demand picking up in the third and fourth quarter. In the cartel's release, al-Sada also said the recent decline in oil prices and market volatility is "only temporary."

"These are more of an outcome resulting from weaker refinery margins, inventory overhang — particularly of product stocks, timing of Brexit and its impact on the financial futures markets, including that of crude oil," al-Sada said.

John Kilduff, founding partner of investment management firm Again Capital, said he does not agree the latest dip into the upper $30s means a floor has been set. He add that the timing of the Sept. 26 energy ministers meeting may be closer to when crude does reach a bottom.

"That could be the low point of an oil price decline," said Kilduff. But he says oil could start to move higher later in the fall, once demand picks back up.

"The rebound we're seeing right now is a function of the record short position that got built up in this market," said Kilduff.

The word 'cut' is not being mentioned anywhere and 'freeze' is not anywhere. The 'freeze' in OPEC is that everybody's ice cube freezes at a different temperature. At Doha, a lot of the language was very vague.
Bhushan Bahree
senior director, IHS Energy

So far, with oil above $40, there are no expectations that OPEC will do anything.

"At this point, there's nothing that seems to be on the table. Yes, the Venezuelans are hurting, and they're trying to get something together, but they have been trying for two years now," said Bhushan Bahree, senior director of research firm IHS Energy. "There's no evidence that somebody else is suggesting something concrete to do, for now."

But Croft says that could change if oil were to head sharply lower.

"One thing they really could do is bring forward the Venezuelan proposals to explore production bands for individual countries," said Croft. She said they would not likely take action but could form a committee to study the Venezuelan idea.

"Even talk of a new mechanism would be enough to change the sentiment if you have people thinking OPEC might be out there and be relevant again. The thing I took away from June was they were saying, 'Don't assign us to the dustbin. We're still relevant,'" said Croft.

OPEC's feuding has kept it from coming up with any deals, despite its talks at the cartel's general meetings and at an April special meeting in Doha, Qatar.

Since OPEC agreed in November 2014 to let the market set oil prices, some of the hardest-hit members have worked unsuccessfully to bring about a freeze that would give the cartel more control over pricing through production levels.

"The word 'cut' is not being mentioned anywhere and 'freeze' is not anywhere. The 'freeze' in OPEC is that everybody's ice cube freezes at a different temperature. At Doha, a lot of the language was very vague," said Bahree.

Saudi Arabia, OPEC's biggest exporter, successfully led the cartel to end production quotas and leave pricing to the market. But OPEC members and nonmembers alike continued to pump high levels of oil, flooding the market with even more crude and driving the price down into the upper $20s per barrel in February of this year.

'There may be a little bit more to it this time'

Saudi Arabia has repeatedly said it would not agree to any deals on production unless all producers agreed, and it is seen as the key to any change in stance by OPEC. There's no sign that the kingdom is seeking a change.

At the same time, Iran has refused to agree to curb production since it has been in the process of returning the barrels to market that it was unable to export while under sanction for its nuclear program. Iran too has had no reaction to the recent chatter.

Iran's re-entry to the market has been met with price wars as producers struggle to hold and build market share.

"There's still this incredible battle. This is the problem with having U.S. production and having less demand in the U.S. Everything becomes a battle for Asia. It's also internally within OPEC. Iraq has been stuffing a lot of barrels into China. It's a fierce battle for Asian market access. They're competing against Russia," Croft said.

Non-OPEC Russia, the world's largest producer, would be key to any production deal, and Russian Energy Minister Alexander Novak was quoted in news reports as saying Moscow sees no reason to discuss a freeze but would be open to talking if prices fall further.

Novak also reportedly said that he could meet his Saudi counterpart, Khalid al-Falih, in September.

"There may be a little bit more to it this time. I'm still very skeptical, but it's just with Iran being where they are production-wise, they'll be more inclined to eventually go along with a deal," said Again Capital's Kilduff.

Kilduff said Iran is 80 percent of the way toward bringing back the barrels it could not export while under sanctions for its nuclear program.

Saudi Arabia also may have fresh motivation now that it is working to make its new domestic economic plan work, and it does not want oil to be too low or OPEC too fractured ahead of the planned IPO of Saudi Aramco next year, Kilduff said.

"The IPO is definitely a consideration. This next trip down (in price) could push them back into each other's arms," said Kilduff.

Some unnamed OPEC officials were quoted Monday as saying a freeze is not in the cards. "So much of this is a joke. If they strike a freeze at these levels, we're at record (production levels). Saudi is at 10.5 million. Iran is coming back and if the hike is U.S. rig counts keep coming, it's more of the same," Kilduff said.

"The market has richly rewarded this rhetoric, and you can't argue that," he said.

Mike Dragosits, senior commodity strategist at TD Securities, said he doesn't think OPEC will need to do a deal, despite the efforts being put forth by Venezuela and Ecuador. Venezuela is a concern for the oil market, since its economic problems and political instability have cut into production and make investment impossible.

"In my mind, it's not necessary. Demand is growing and U.S. production is still in decline. I think we may see that in the second half of the year, it's a more balanced market," he said.

Dragosits said there's no sign that Iran or Saudi Arabia are backing a meeting or a deal.

"It's not clear in my mind how much impetus there will be for all members to agree, particularly Iran and Saudi Arabia on this production cap, but I think they'll continue to leak out rumors," he said.

As for OPEC, al-Sada was quoted in the release as saying that "OPEC continues to monitor developments closely, and is in constant deliberations with all member states on ways and means to help restore stability and order to the oil market."