There's something about the cheer that's been building for a very long time in your throat, the one that has caught and been stifled more than once, the one you're never quite sure will ever come out. But it erupted last week when finally – after almost two years of pain - OPEC struck a deal on oil production. If you listen hard enough, that hard-to-come-by cheer can still be heard, echoing off walls. Particularly in Venezuela.
Let’s just hope it sticks. You see, chaps, the devil’s in the detail and the detail isn’t going to be agreed on until November 30th. As The Guardian put it, “OPEC seems to have been taking lessons from EU summits. It has agreed that something needs to be done but has put off until another day the rather more difficult task of getting its fractious membership to decide what they should be.”
But until it’s un-done, it’s done and the markets are a much happier place to be. Oil prices settled up nearly 6% when the announcement was made. The infectious good spirit was enjoyed in Wall Street too where its index of US energy stocks rose 4% – the best one-day gain since the start of the year. Brent crude rose to 5.9c pb and WTI leapt about the same to $47.05 following the two day meeting.
It’s an important deal as the Telegraph says, particularly for the energy companies left reeling after prices collapsed from a June 2014 high of $115 pb to $27.88 in January.
The agreement in principle is that output would be limited to between 32.5m bpd and 33m bpd. Current output is 33.24m bpd. “This is the end of the production war – OPEC claims victory!” cheered Phil Flynn, an analyst at Price Futures Group in Chicago. He told Reuters, “The cartel proved that it still matters, even in the age of shale.”
It’s more likely however, a reluctant acknowledgement of a very simple truth – Saudi Arabia’s oil policy isn’t working. The Wall Street Journal says people ‘familiar with this matter’ (sounds deliciously creepy doesn’t it?) reported that the Kingdom’s energy minster Khalid al-Falih’s attention was drawn to an OPEC prediction that a global glut was likely to remain throughout 2017. Faced with the consequences of its policy to date – introducing unpopular domestic austerity measures and a decision by the US Senate to allow 9/11 victims to sue the Kingdom for its potential involvement which saw Saudi’s currency plunge to its lowest level in four months – perhaps it decided to lick its wounds and live to fight another day.
What is very interesting is the thaw in Saudi Arabian/Iranian relations. Bijan Zanganeh didn’t even turn up to the last meeting which prevented a deal being struck – insisting at home that Iran would support any deal to cut production that OPEC made, just so long as they didn’t expect Iran to jump I too – so soon after sanctions were lifted. However after the meeting he told reporters, “OPEC made an exceptional decision today…After 2 ½ years OPEC reached consensus to manage the market.”
An obscure commitment made by al-Falih may yet prove to be the sticking point in this international love-in. He conceded that Iran as well as Nigeria and Libya could produce “at maximum levels that make sense”. Just what that level that makes sense is, is unclear.
On the other side of the fence are the frackers, who have withstood everything and the kitchen sink that was tossed their way. This move signifies that OPEC now realises it is no longer the force it once was. But it is better to share a piece of the cake than have none.