OPEC Discuss Oil Deal Cheaters, but Experts Doubt Any Substantive Outcomes

There is doubt the OPEC meeting will sway prices one way or another.

As the two day Organization of the Petroleum Export Countries (OPEC) meeting in Abu Dhabi kicked off on Monday with a focus on member compliance of its production cap initiative, a host of experts and critics shared their thoughts about possible outcomes of the congregation - but few if any thought the meeting would produce substantial results or sway the market one way or another.

Julian Lee, oil strategist for Bloomberg News, said of the meeting, "the real culprits in this are predominantly Iraq, interestingly the United Arab Emirates...and then Venezuela, [but] I don't think we should expect too much from this meeting, this is not a ministerial meeting....it's one of a series of monthly meetings OPEC has to monitor this agreement."

He added that OPEC members and Russia will be studying why there's compliance issues and what can be done to strengthen the cutbacks; but when it was suggested that the reason may be as simple as a willingness to cheat, Lee replied that for some countries such as Iraq it's "enormously difficult" to reduce production without further harming their own economy; plus, Iraq "objected to the second resource estimates of their production; they felt that everybody was underestimating their production, so their starting point was too low."

Lee speculated that one way around the difficulties of the cheating OPEC nations may be to focus on export figures rather than production numbers.

When asked if the OPEC meeting could affect oil prices in the near term, Tom Petrie, chairman at Petrie Partners, told Bloomberg that the two countries receiving the most media attention for their non-compliance, Nigeria and Libya, need to be included in cutbacks moving forward, "and I think there will be some sort of effort in this discussion to establish some kind of cap on their production; the upside could be there, but unless there's an agreement that figures out how to accommodate the production levels....the market's going to remain doubtful on this situation."

Petrie added that another factor of importance that may positively affect the market aside from the meeting is the strength of the global economy, a leveling out of drilling activity, plus substantial draws on U.S. inventory - all of which he says will be good news for prices if the phenomena continues.

Bob Iaccino, co-founder at Path Trading Partners, echoed the sentiments of many observers when he said, "OPEC has lost a bit of credibility in the fall of the percentage of [cutback] compliance.....if they can actually get their heads together at this meeting, they can get that [market] move they've been looking for."

Iaccino offered his own take on rig counts and their effect on the market: "We've had two up one down, two up one down: that's not going to maintain given the legacy decline in production that we've got in the U.S. shale patch right now, down 350,000 barrels in legacy production from July to August: you have to have these rigs count at least going in the right direction given the legacy drop-off we've had in order for prices to continue lower - that's not happening in the short, short term."

Meanwhile, Tariq Zahir, a managing member at Tyche Capital Advisors, confined his analysis exclusively to numbers by stating, "Spot prices, we feel, are going to be rather choppy as we await the decision from the OPEC compliance meeting."

Last week, Barclays made a bid at explaining price movements in forecasting Brent at an average of $54 per barrel during the fourth quarter, and in doing so it inadvertently downplayed the significance of the OPEC meeting: "Prices have moved higher, due to a perfect combination of a favourable macro environment, a seasonal uptick in consumption, continued inventory drawdowns, and geopolitical unrest; certain factors that supported prices in July are unlikely to last.

"Fundamentals remain shaky this quarter, therefore any rally that occurs before more substantive inventory draws would be short-lived."