OPEC Takes No Action to Ease Supply Glut as Oil Slumps
Comment of the Day

November 27 2014

Commentary by David Fuller

OPEC Takes No Action to Ease Supply Glut as Oil Slumps

Here is a latter section of this topical report from Bloomberg:

“The change is that it’s no longer Saudi Arabia and OPEC that are going to be managing the supply side of the market,” Michael Wittner, head of oil market research at Societe Generale SA, said in an e-mail. “That is so fundamental, it is hard to overstate.”

The Organization of Petroleum Exporting Countries considered a cut of 5 percent in output, according to Iraqi Oil Minister Adel Abdul Mahdi. That’s about 1.5 million barrels a day based on the current ceiling.

“If you cut 5 millions, this will raise the prices of course,” Mahdi said. “No one discussed a large cut, maybe 5 percent was the utmost that some people wanted.”

OPEC will convene again on June 5 in Vienna. The decision not to change the production ceiling was anticipated by 58 percent of respondents in a Bloomberg Intelligence survey this week.

“We are not sending any signals to anybody, we just try to have a fair price,” Secretary-General Abdalla El-Badri said at a press conference. The group will abide by the limit, he said. El-Badri will retain his position until the end of 2015.

Iranian Oil Minister Bijan Namdar Zanganeh told reporters after the meeting that he was “not angry” about the decision, but it was “not in line with what we wanted.”

David Fuller's view

The opening comment above is the most relevant in my opinion.  OPEC’s agreed production ceiling since 2012 has been 30 million barrels a day, but this has been exceeded most months, according to several reports.  OPEC’s production will probably increase, unofficially, following today’s meeting, in a desperate search for a little more revenue. 

The Saudi’s have no interest in cutting their supply to help rivals.  Moreover, their unofficial goal, presumably shared by other countries in today’s closed-door meeting, is to knock back US shale oil production. 

Interestingly, the markets’ response today has been to lower sharply the value of oil-exporting countries’ currencies, which have been generally soft throughout crude oil’s decline.  This is understandable but while the US is not an oil exporter, it is one of the biggest producers at approximately 9 million barrels a day, thanks mainly to shale.  Moreover, the US Dollar Index (DXY) rose today and has surged over the last five months. 

Is it logical for DXY to rise further at this time, for reasons other than current trend momentum?   Currencies are a relative comparison, and one of the reasons investors have been bullish of the US economy and the Dollar more recently has been shale oil production which has certainly contributed to the 3Q GDP figure of 3.9%. 

Investors are extrapolating this gain but does that make sense over the next quarter and possibly longer?  After all, the US is currently experiencing one of its coldest ever Novembers on record, and we know how last winter’s freezing weather lowered 1Q 2014 GDP.  Moreover, recently booming shale production has been a big contributor to US GDP, but this sector is now due for a shakeout given the slump in crude oil prices.  Lastly, the recent softening in US 10-Yr Government Bond yields does not suggest that 4Q GDP will rival the previous quarter.      

Of course the US shale sector’s decline will be at least partially offset by benefits to consumers from lower gasoline prices.  However, countries that produce very little oil will be the biggest beneficiaries, and I believe India heads that list.

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