OPEC’s approach is similar to the Fed’s rate hike strategy
Throughout 2015, global markets swung back and forth as analysts waited for the U.S. Federal Reserve to implement a rate hike.
The much awaited decision in spring was rolled over and then moved again till December when the hike was finally announced.
Doha’s meeting between members of the Organization of Petroleum Exporting Countries (OPEC) on April 17 concluded, as anticipated, without a production freeze or even an agreement related to the members’ production levels.
This was the same outcome of OPEC’s last two meetings in December 2015, and February 2016. The decision has now been delayed till OPEC’s next meeting in June.
In the same way that the Fed controlled expectations, OPEC is sending a very clear message to markets: the deal is not dead, just delayed.
While oil producers in Doha have remained tight lipped on meeting details, they have confirmed that more time was needed to consult and/or to agree on specific terms, and that they would continue to negotiate and exchange ideas in advance of the June meeting.
Saudi Arabia for some time has insisted that it would only agree on a deal that includes all producers. Though it makes sense, it is not what Iran wants to hear.
Tehran has just returned—as a major producer—to the international oil market and refuses to commit to a production freeze at the time being; at least not until it reaches higher production levels than its current 3.6 million barrels a day.
In fact, Iran has openly said that it will not stop boosting oil output until it has reach the 4 million barrels/day production level.
According to March surveys, Iran produced an average of 3.6 million barrels/day, or 400,000 barrels short of their target which could very well be reached by June.
The Persian state has also very publicly refused to freeze production because of a firm belief that a freeze is akin to self-imposed sanctions.
OPEC’s June meeting may very well bring good news for global producers and markets alike. If by June Iran is indeed producing 4 million barrels/day, it is likely that Iran will show more flexibility towards a production freeze.
Many analysts believe that producers appear to be cooperating to allow Iran the time to reach its target, so that it can no longer use this excuse to block a deal.
Sunday’s meeting, however, had a grim impact on the oil market as Crude Oil lost around 7 percent at the beginning of April 18’s trading, with markets evaluating the news that production, for the time being, will remain at status quo.
More recently, Crude prices rallied up to a five-month high on April 20, on unexpected news that U.S. distillate stockpiles—which include diesel and heating oil—have shrunk. That, in addition to news of a possible resumption of strike among Kuwait oil workers.
Despite the failure of the Doha talks, producers have committed to maintain an ongoing dialogue. The dialogue itself is likely to keep markets optimistic. This contrasts with last year, when producers refused to even meet or to hold an emergency meeting.
As the negotiations continue, just as what happened with the U.S. Reserve rate hike, the price should be supported until the decision is announced.
In that sense, an optimistic outlook from markets on the June meeting may serve as the catalyst, and if so, crude may continue to trade within range with no notable declines or extreme gains.
The writer is Senior Vice President, Chief Market Strategist ADS Securities.