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Above Freezing
OPEC Sees Need for an Output Cut

Members of OPEC just concluded an ad-hoc meeting on the sidelines of the International Energy Forum in Algiers today without a firm commitment to “freeze” output at current levels. This doesn’t come as any great surprise—there was a large gap between Saudi Arabia and Iran in negotiations, hinging on Tehran’s insistence on only capping its own output once it comprised 13 percent of the cartel’s total production. The Iranian oil minister was careful to call today’s summit “consultative” in nature, and without any concrete deal coming out of the meeting, that’s exactly what it was.

But this round of freeze talks was more productive than the last attempt, which produced nothing but acrimony back in Doha this spring. This time around, the group came out of the meeting in agreement that there is a need to cut output to help balance the market (and set off a price rebound). The FT reports:

After four-and-a-half hours of discussions in Algeria on Wednesday, the 14 member group has reached a consensus that output cuts are needed to help lift prices and rebalance the market, according to Opec delegates, report David Sheppard in Algiers and Anjli Raval and Neil Hume in London. […]

The size of the cut or how the reduction will be achieved is not yet clear. Reports this evening suggested the cartel would drop output to 32.5m barrels a day, nearly 750,000 b/d lower than the level it pumped in August, and that that decisions on how much each country will produce will be agreed at the next formal Opec meeting in November.

The last time Opec lowered production was during the global financial crisis in 2008.

It’s notable that just the announcement of intent sent oil prices soaring more than 5 percent in trading on the day. Maybe this time is different, but there’s every reason to be suspicious that the cartel is simply continuing to do what it’s done throughout the year: blow hot air about intervening in the market to make traders skittish and send oil up a few dollars, without actually following through by doing anything. It’s a reckless strategy, because at some point the credibility gets used up. But in the intervening time, OPEC economies (and Russia) get some short-term relief for their badly-stretched budgets.

And let’s not forget the big problem hanging over any potential production cut: American shale producers. U.S. oil production has flagged over the past two years as fracking firms have struggled to deal with shrinking profit margins as a result of falling crude prices. If OPEC makes the cuts it says are needed and oil prices rebound accordingly, American companies could be the biggest beneficiaries, and we’ll undoubtedly see a spike in U.S. output once again. That not only limits the efficacy of OPEC’s market intervention options, it also threatens the cartel’s share of the global market. We’ll be watching.

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  • Andrew Allison

    Yaaaawn! It’s a tentative agreement to cut OPEC production by less than current oversupply (and less than half the Russian production increase just last month) subject to agreement about who cuts how much. OPEC is a sideshow undeserving of the attention being given to it.

  • f1b0nacc1

    Perhaps everyone agrees to the need for a cap (or even a cut?), but what nobody agrees to is just who gets to bell the cat….
    Repeat after me, the US is the new swing producer….

    • Andrew Allison

      I thought I’d copyrighted that line [grin]

      • f1b0nacc1

        True, true (I only steal from the best)….next time I will footnote you!

        Remember what Lobachevsky (as quoted by Tom Lehrer) said…”Plagiarize!, but remember to always call it please…research.”

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