Americas News
Commerzbank: Ineffective Oil Cutback Deal Shows OPEC Has Lost its "Pricing Power"
Eugen Weinberg, head of commodities research at Commerzbank, last week was the latest expert to declare that the Organization of the Petroleum Exporting Countries (OPEC) will probably extend its crude production cutback initiative to the end of 2017 when it meets in Vienna later this month to decide the issue; however, also portrays the cartel as a lame duck in terms of influencing the market.
He stated in a note: "The fairly short-lived effect of production cuts on oil prices shows that OPEC's market impact via 'supply control' is very limited; we have been pointing out for years that OPEC has lost its 'pricing power'."
But he added, "Even so, OPEC is unlikely to throw in the towel already and make another U-turn, but will extend the agreement instead."
Weinberg's remarks cap a week of analysis that suggests an OPEC cutback extension is likely and needed, but for the sake of averting market disaster rather than encouraging a market rebalance and boosting prices as originally intended.
Jonty Rushforth, global head of oil pricing at S&P Global Platts, is another critic who suggests OPEC won't be able to lift prices, based partly on the fact that active rigs in the U.S. "are above 1,000, and the impact of that isn't felt until about 6 to 9 months afterward."
He told CNBC that "Stocks are very high around the world ... and as much as OPEC cuts, that increases OPEC's surplus production capability: that means there's always a way of the market to supply if its needed, so volatility is probably going to suffer in the next several months; it's very difficult to spike if you've got OPEC there to produce at any time."
Taking the contrary view, Jonathan Barratt, CIO of Ayers Alliance Securities, told CNBC that while OPEC and the U.S. "are happy to produce" and create "a bit of an imbalance...economic growth will actually absorb anymore supply that comes on the market"; he also blamed speculative trading for the last few rocky weeks of trading.
While that may be true, there are reasons that inform speculative trading, and Alan McIntosh, chief investment strategist at Quilter Cheviot, voiced one that bothers traders the most: "The relentless increase in U.S. shale supply has offset the production cuts that OPEC and Russia agreed and so there is still a skepticism within supply and demand balance."
Earlier last week, Robert McNalty, founder and president of The Rapidan Group, said the recent modest market rebound is of no significance, and even if OPEC extends its cuts we are likely headed for crude prices in the low $30s.
