On August 8th, OPEC published a press release stating that H.E. Dr. Mohammed Bin Saleh Al-Sada, Qatar’s Minister of Energy and Industry and current OPEC president, had scheduled an informal meeting of OPEC member countries to take place on the sidelines of the 15th International Energy Forum which will take place in Algeria from 26 to 28 September 2016. This renewed rumors of another production “freeze.” But then prices began to fade until last Thursday, when the Saudi Press Agency reportedly emailed a statement to journalists quoting Saudi Energy Minister Khalid al-Falih as follows:

“…We are going to have a ministerial meeting of IEF in Algeria next month, and there is an opportunity for OPEC and major exporting non-OPEC ministers to meet and discuss the market situation, including any possible action that may be required to stabilize the market…”

 

In an interview published Monday, Russian Energy Minister Alexander Novak was quoted Saudi-owned newspaper Asharq al-Awsat that a complete return of market stability is likely in 2017.

“…With regard to the cooperation with Saudi Arabia, the dialogue between our two countries is developing in a tangible way, whether in the framework of a multi-party structure or on a bilateral level…We are ready to achieve the widest possible level of coordination… and put in place joint measures to achieve oil market stability, with the condition that these measures will not be for a limited period of time…” Novak said.

 

The likelihood that Saudi Arabia or Russia will actually limit their production is close to non-existent. Therefore, this is just a bluff.

 

Saudi Arabia

There is no doubt that It’s tiresome to listen to the ongoing lies of those leaking information on the alleged consensus from OPEC that there will be a production freeze: it’s not going to happen! We’ve been on record for months saying it’s all a hoax designed to temporarily boost the price of oil. While it does work for a short period of time, it isn’t something any investor should count on for the long term. An OPEC output freeze is not in the cards. It’s unlikely it’ll ever happen again.

 

The key thing to understand, outside of the fact that there is no consensus to participate in a production freeze, is that even if there was one, the major suppliers are already producing at or near record levels. A freeze would do little if anything to alleviate inventory levels anytime soon. This is especially true in 2017, when the EIA is looking for demand growth to contract from 1.4 million barrels a day growth rate in 2016, to 1.2 million barrels per day in 2017. The world now consumes 94.8 million b/d of oil, up from 86 million b/d in 2008 and a 11% rise even amidst the worst economic times since the 1930s.

 

OPEC as a cohesive unit no longer exists, if it ever did. In the past, just about everyone knew a number of member states that weren’t adhering to production freeze agreements, but now there isn’t even an attempt to hide the fact that each member of the cartel wants actions taken based upon individual interests alone, and not the interests of all members. That’s one of the reasons calls from Venezuela for an output freeze has received no response. No OPEC member is going to agree to production cuts that will result in a major and fast resurgence of the U.S. shale industry, which would bring about a loss of market share to OPEC members.

 

The consequence would be higher prices per barrel, but less oil sales. For that reason it’s not a certainty that higher prices would result in more revenue and earnings.

 

As mentioned, investors should no longer consider OPEC as a group of states that support each other. Everyone is out for what is best for their own nation, and that in fact is really what should be the case.

 

What should happen is for OPEC to dismantle itself, as there’s no longer a reason for its existence, if there ever was. It can no longer dictate the price of oil at any point except the lowest one, because all it can do is produce oil at the highest level in order to maintain or attempt to grow market share.

 

Any action taken to support the oil price only plays into the hands of U.S. shale producers, which would benefit from any increase in the price of oil, eventually bringing them more market share. The largest OPEC producers know this, which is why they reject calls for production cuts to artificially boost the price of oil. It’s also why Saudi Arabia continues to call for market forces to dictate supply/demand equation.

 

Saudi Arabia has always been the de facto leader of OPEC, and it’s too bad many of its less productive members aren’t following its lead now.

 

That isn’t to say Saudi Arabia suddenly got free market religion. It’s to say that the emergence of the robust U.S. shale industry has forced it to do so.

 

The U.S. shale industry has completely disrupted the oil sector, and nothing will be able to put that genie back in the bottle. All OPEC can do is slow down the growth of the shale industry. It can’t stop the growth. Its only weapon to maintain market share is to keep pumping oil. Saudi Arabia knows this, which is why it has called for at least two years for competitors to move in conjunction with supply and demand, or to find ways to cut costs in order to be more competitive.

 

In other words, there is not going to be a production freeze agreement in the future. Iraq agrees with that assessment, as do Nigeria and Libya, both of whom are experiencing lower production from outages associated with internal strife. Neither will agree to a production freeze under those circumstances.

 

Iraq, which is the second-largest producer in OPEC, behind Saudi Arabia, recently stated it has no intention of agreeing to a production freeze.

 

Not only is it not interested in a freeze, on the contrary, it is preparing to ramp up production in the months ahead, and in the near term has increased oil shipments by approximately 5 percent. That doesn’t sound like a country ready to enter into an output freeze.

 

Iraq is competing to gain market share as low oil prices continue to reduce the amount of shale production in the U.S. The idea of giving up market share for the sake of higher price, which as mentioned earlier, would revive the U.S. shale industry in regard to borderline competitors, makes no sense whatsoever.

 

A freeze would only help the countries unwilling or unable to compete at the current price range of oil. No quality oil producer is going to underwrite those producers by giving up share to U.S. shale companies. It isn’t going to happen. This is the reality.

 

I no longer consider these press releases disguised as news as legitimate. In fact, they have to be taken as the outright lies they are. There is no chance OPEC is going to freeze production. Every time one of these reports are presented as a real possibility, several OPEC countries come out and reject the idea.

 

That obviously means these reports are contrived by those that will at least temporarily benefit from the false news. The idea there is any type of consensus by OPEC to freeze production has never been based in reality. It still isn’t.

 

With the two top OPEC suppliers already saying there is no way a production freeze agreement will take place, it’s totally safe for investors to immediately dismiss the idea.

 

That’s not to say there isn’t money to be made from the verbal intervention, even when it’s a total lie. Lots of investors jump in because the market does reward the dishonest assertion with a boost in the price of oil.

 

What to watch for there is the spread between the announcement, which is couched in terms that suggest this time it really is a possibility, and the time leading OPEC players go public with the fact nothing is going to happen. This isn’t the end of the fake verbal intervention. Those wanting to make some quick money should get in immediately after the announcement, and get out before the inevitable news is released that once again there is no oil production freeze in OPEC’s immediate future.

 

By causing traders to bid the price up, they are enabling U.S. producers to increase drilling and hedging. These activities will cause this strategy of manipulating prices to ultimately backfire.

 

By Vasko Nachev

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