Market Forces Have Stripped OPEC of its Relevance

Inaction was the word of the day Thursday in Vienna, Austria after the Organization of the Petroleum Exporting Countries (OPEC) emerged from a long-awaited June meeting with no changes in policy.

In a statement, Saudi Arabia’s oil minister said any kind of production ceiling would put the cartel in a “dilemma” and such action would be premature until a longer term picture becomes clearer.

The outright refusal by OPEC nations to adjust policy or trim their output levels in the face of ultra-low prices – and then witness a more than 80% rise in the 2016 price of crude – begs the question: Is OPEC still relevant?

Omar Al-Ubaydli, affiliated senior research fellow at George Mason University’s Mercatus Center, said the meeting’s outcome was 100% predictable and all the bluster about a growing rivalry between Iran, which earlier this year saw relief from international trade sanctions, and Saudi Arabia is a distraction.

The bottom line, he said, is there is no international cartel in any commodity – be it gold, copper, wheat, and even oil. Rather, he contends the swift swoon in oil prices in the summer of 2014 to the recovery crude has made so far this year, is a simple act of market forces.

”The market is bigger than any of these nations,” he said. “There is a large enough number of producers that no one nation is going to do anything to steer prices in one direction. Like any other commodity, there are ups and downs.”

Al-Ubaydli said while it’s good publicity for OPEC nations to make it seem as though there were active policy negotiations, for the most part, it’s smoke and mirrors.

“Western countries were happy to let OPEC think it had power because they could blame [low prices] on any difficulties. OPEC likes to think it has power because they get to say we’re sticking it to the man, and holding the West by its throat…but ultimately it’s about politics in each country,” he said.

Suzanne Minter, Platts Bentek Energy oil and gas consulting manager, said regardless of what happens with OPEC from here, what matters now to the rest of the oil-producing world is prices. And with the cost of crude hovering around the $50-barrel mark, it spells opportunity for non-OPEC nations, including U.S. producers.

Essentially, it’s every man for himself in this environment.

“We expect to see U.S. production stop declining at this point, and actually grow in the first quarter of next year,” Minter said. “Producers I’ve talked to have said with these prices, they’ll bring production on and maybe activate new rigs.”

"The market is bigger than any of these nations."
- Omar Al-Ubaydli, George Mason University
The result of bringing more barrels into the market – no matter the nation or region that produces them – will be a shorter commodity cycle for crude oil. In essence, the more supply that comes onto the market, the more downward pressure that will be applied to prices if demand holds steady.
For U.S. producers, whose operations don’t necessarily involve infrastructure and refining businesses, it means that if excess supply comes onto the market, they can keep pumping with the ability to sock away the product into storage.
“OPEC is so integrated: They own the production, the pipeline, the refinery, every piece of the chain. They can’t stop pumping because the producer is linked to everything,” Minter explained. “The lack of integration between infrastructure and supply is a big difference in the U.S.”
Minter explained that until producers lose the ability to run barrels of crude through refiners and stockpile them in various storage options like unused pipelines, oil producers – particularly in the U.S. – will continue pumping in a $50-barrel world.
Further, the record high oil prices reached in 2008 helped fund exploratory drilling for U.S. producers, which means when they decide to turn the pumps back on, they know exactly where to go, and won’t have to spend more cash to find the best acreage.
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But the middle ground price level won’t be a sustainable model forever. At some point, there will be losers in the market, Minter said. It just isn’t likely to be who OPEC had originally targeted with its mission to keep spigots open during the oil-price freefall of 2014.
“It’s going to end badly at some point. European refining margins are first to go because they’re closest to zero. What’s holding them up right now is gasoline demand,” Minter said. “Once gas prices start to weaken, European refiners will start to back down first. That takes some refined product out of the market, but Saudi wanted the U.S. refiner to go away [not European refiners].”