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OPEC and Russia Sending Signals, U.S. Poised to Start Recovery

            OPEC seems to be on a mission to get some sort of production deal in place since their announcement in Algiers last month that the cartel would work to freeze production. Since the meeting, it appears that OPEC members have had several meetings among themselves in an effort to bring some shape to the deal.

            But it will be challenging to get a deal done to say the least. OPEC reported an increase in its oil production in September to the highest in at least eight years and raised its forecast for 2017 non-OPEC supply growth, pointing to a larger surplus next year despite the group's deal to cut output. The Organization of the Petroleum Exporting Countries pumped 33.39 million barrels per day (bpd) last month, according to figures OPEC collects from secondary sources, up 220,000 bpd from August, OPEC said in a monthly report on Wednesday. Under the terms of the preliminary “agreement to agree” established last month, OPEC is going to curb production to between 32.50 and 33.00 million bpd.

            Speaking at the World Energy Congress in Istanbul, Saudi Arabia’s oil minister Khalid al-Falih stated his belief that OPEC needed to take measures to stabilize the markets, although he did offer his opinion that those measures should not be too drastic. "OPEC needs to make sure we don't crimp too tightly and create a shock to the market. We are going to be very responsible," Falih said.

Falih’s comments can be viewed as lukewarm. On the one hand, it is clear that Saudi Arabia has a strong desire to see market stabilization, both so it can balance the budget (currently running huge deficits), but more importantly, to prepare for the Aramco IPO, perhaps one of the biggest in history, that is now targeted for 2018 and critical to implementation of the Saudi Vision 2030 plan to modernize its economy and reduce its dependence on oil.

            Mr. Putin, our favorite oligarch, jumped in and confirmed Russia’s willingness to help this week. Mr. Putin stated, "Russia is ready to accede to joint measures to reduce [oil] production, and is calling on other oil exporters to do so.". However, he was contradicted the very next day by Igor Sechin, the president and chairman of Russia's state oil company, said he saw no reason for an immediate freeze or cut in oil production.

            The interesting question for Russia is: Can it even do so if it wants to. And the answer to that seems to be mixed. Commentators have argued that for the deal to be effective, Russia will probably have to reduce its output close to 2 million bopd. This seems awfully high to me. And commentators seem to go both ways on whether Russia can control its output if it decides to do so. Many have argued that Russia cannot curtail production because so much Russian production is in the private sector – an argument Russia has itself made in the past.

            But at least some commentators disagree, arguing that today the state directly controls about half of output, with most of the rest in the hands of business leaders loyal to Putin, these commentators argue that Russia can control its production.

Nevertheless, we know that OPEC members met this week with non members, including Russia, Azerbaijan and possibly Mexico to discuss the freeze. And we now know that they are contemplating a freeze of at least six months, with some members advocating for a year. If that is the case, then perhaps an OPEC/ Russia deal will be sufficient to alter the pricing forces in place.

 

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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