The Daily Reckoning UK

Is This The Most Important Meeting Of The Year?

Darren Sinden

by

Posted 19th May 2017

One of the most important meetings of the year so far will take place on the 25th of May, in Vienna.

Its importance lies in that fact that any decisions made at this meeting will directly affect the daily lives of hundreds of millions of people around the globe.

The meeting in question is of the Organization of the Petroleum Exporting Countries, or OPEC as it’s more commonly known.

Representatives from its thirteen member states will convene in Vienna to discuss what they can, and are prepared to do to support Oil prices.

I am sure you will recall that after much wailing and gnashing of teeth last autumn, Saudi Arabia was finally able, in November 2016, to persuade the cartel members to limit their production of Crude Oil and thus stem the fall in the price of a barrel of the same.

In an act of impressive diplomacy the Saudis were also able to agree production cuts with several non OPEC members, foremost amongst which was Russia.

The forthcoming meeting takes place against a background of potential rising supply and a far from clear cut picture, as far as rising demand and global economic recovery is concerned.

Whilst crude prices have indeed bounced well away from their lows seen in February 2016, during the Saudi attempts to squeeze higher cost producers out of the market, it’s not clear that current production cuts have been fully implemented or are particularly effective.

Nor is it certain that current production agreements will be extended beyond 2017 and Crude supply could build quite quickly again in 2018 if they are not.

US investment bankers, Morgan Stanley, believe that an additional 2.50 million barrels per day of crude oil could be on stream in 2018.

According to their calculations, producers would need to find an additional source of demand of between 1.3 and 1.4 million barrels per day to “balance the books”, as it were.

If they can’t, then oil prices could be heading lower once more.

Of course, it’s not even three years since oil prices were north of $100 per barrel, but even the most optimistic of oil analysts is not expecting those levels to return anytime soon.

So what’s changed in this relatively short space of time, as far as Oil prices are concerned?

Well, for my money, there are two key determining factors at work here…

Firstly, the mystique of and around OPEC has disappeared. The cartel rose to prominence in the 1970s, when they effectively held western economies to ransom by sharply jacking up crude oil prices in a series of so called oil shocks.

Ever since then the west has been looking for additional supplies of oil, away from the Middle Eastern and Persian Gulf heartlands of OPEC members.

At the same time, developed economies have also been moving towards the use of alternative cleaner and renewable energy sources.

For example, the UK recently generated electricity for whole day without recourse to burning coal.

Whilst that sound bite doesn’t directly affect oil prices, the implication is that at some point in the future it could.

OPEC’s weaknesses and defects were cruelly exposed at its November 2015 meeting, When production agreements could not be reached and no compromise was attained between the Saudis, the Iranians and the Iraqis.

The result was that Saudi Arabia went its own way and prices continued to decline.

In effect, traders saw behind the OPEC curtain at that meeting, and realised that OPEC was, at that stage at least, a busted flush.

Let’s not forget either that there are a myriad of different political interests and agendas among OPEC members…

For example, Saudi Arabia and Iran are backing opposite sides in the bitter conflicts of the Syrian civil war. The Saudis are backing the Syrian rebels, whilst attempting to quash a similar uprising in Yemen.

The Iranians are supporters of Syrian President Bashar Assad, a Baathist or Arab socialist – The same political persuasion as Iran’s implacable enemy of many years, Saddam Hussein.

The differences between Saudi Arabia and their regional rivals Iran came to surface recently, when Saudi Crown Prince Mohammed bin Salman (a leading light in Saudi oil policy) said Saudi Arabia was aware of Iran’s intentions towards the Kingdom and that:

“We (Saudi Arabia) will not wait until the battle comes to Saudi Arabia but we will work to have the battle in Iran rather than in Saudi Arabia.”

Iran responded in kind with its defence minister Hossein Dehghan saying: “If the Saudis do anything ignorant, we will leave no area (of Saudi Arabia) untouched except Mecca and Medina,”

The very fact that Oil prices did not rally on that kind of sabre rattling brings me to my next point…

That oil prices have become detached from political risk, which was for so long one of their principal drivers.

That’s quite a statement to make, but if you consider what been going on in the world over the last six months you have to concede, it rings true.

The principal reason for this can be found in the USA which now has access to a growing supply of domestically produced crude oil. What’s more, this domestic supply is growing and could grow further.

The chart below (courtesy of the US Energy Information Administration or EIA) plots the production of crude oil in the US measured in thousands of barrels per day.


Click image to enlarge.

US production currently averages 9.2 million barrels per day and is expected to grow to 9.9 million in 2018.

Whilst it’s true that the US is still an importer of crude and probably always will be, it is now much less reliant on the foreign supply and transportation of crude – particularly from the flash points of the Persian Gulf and wider Middle East.

Oil prices will likely move on any decisions made in Vienna of May 25th.

My own intuition is that if the current agreements remain in place until November this year, the prices could ease further.

An extension beyond November could be mildly positive for Crude – if OPEC members can demonstrate that they have actually reduced their production.

An increased OPEC production cut would probably see a more meaningful bounce in Crude prices.

But at the same time it would throw down a gauntlet to, and create an opportunity for, US shale producers to pick up the shortfall, if they can.

As I mentioned, this is one of the most important meetings of the year for the markets.

And whatever the outcome, there will be movements in the markets and there could be potential for traders to profit from these.

That’s why Agora Financial UK are holding a very special event exclusively for you.

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