EMEA News
OPEC September Production Figures Undermine "Smoke And Mirrors" Cap Deal
Bob McNally, former White House energy advisor under George W. Bush and founder and president of The Rapidan Group consulting firm, has joined the critical consensus that the Organization of the Petroleum Exporting Countries (OPEC) is more interested in manipulating sentiment than supply by stating that its deal to cap production is "smoke and mirrors."
He told CNBC's Power Lunch, "Really, what'll happen is Saudi Arabia is going back to a normal operating level - about 10.2, 10.1 - and we'll stay there through the spring, and they will hope the market shows signs of rebalancing on its own."
McNally was referring to the fact that the Saudis under the Algeria agreement (should the deal be ratified in Vienna this November) will only return to a normal production level slightly above 10 million barrels per day (bpd) after boosting output to 10.6 million barrels in August.
McNally also predicted a woeful end to the current price rally based on a similar outcome ahead of OPEC's April meeting to discuss production caps in Doha; he believes that prices will hold steady until the Vienna meeting.
However, McNally gives the cartel high marks for its powers of influence: "OPEC has been extraordinarily successful at manipulating sentiment, not supply: despite having increased production by ... almost 900,000 barrels a day since they started talking about a freeze in February, they have been very successful in getting the market to believe they're going to act."
From OPEC's perspective, crude oil demand this year is climbing slightly and supply is forecast to be lower: in its monthly market report for October, the cartel forecast a 0.1 million bpd rise in demand and the 2016 gap between demand and supply rising by 1.8 million bpd to 31.82 million in 2016, compared to 30.06 million in 2015.
The OPEC report stated that it had "caught the market off-guard" with regards to its members vowing to curb production.
The report also showed an oil production increase in September to an eight year high of 33.39 million bpd, up 220,000 bpd from August, and as much as 890,000 bpd above the new supply target.
This disclosure caused Brent on Wednesday to drop 56 cents to $51.85 and West Texas Intermediate to settle down 61 cents to $50.18 – and it triggered a wave of cautionary remarks from experts: "Lots of questions to answer and noises coming from the parties involved can be contradictory; volatility is all but guaranteed," PVM said in a note.
Torbjorn Tornqvist, chief executive officer for Gunvor Group, said, "I don't think they (OPEC) can do any substantial cut: there are too many uncertain factors involved."
The ever-outspoken John Kilduff, founding partner of Again Capital, remarked, "Once again, [the OPEC report] reinforces that their deeds are not matching their words, and that they have a great deal of work cut out for them to try and come to an agreement that will satisfy anything."
McNally's sentiments closely follow two recent and diverging views about the possible consequences of the Algeria agreement: earlier this week the International Energy Agency theorized that he global crude oversupply could deplete more quickly if OPEC and Russia agree to substantial output cuts, but Goldman Sachs offered the majority opinion that higher production from Libya, Nigeria, and Iraq will render the deal meaningless and that the market won't achieve a true rebalance until sometime next year.
