When OPEC ministers announce this week how much oil they plan to pump in the coming months, they’ll be talking to a skeptical market searching for direction. As OPEC’s de facto leader, Saudi energy minister Khalid al-Falih faces his likely toughest test yet, when the organization meets Thursday in Vienna to debate output cuts that his country badly wants but may not have the geopolitical leverage to push through. Russia and nine other non-OPEC allies will join the talks on Friday.
ICE Brent futures have tumbled almost 30% in the past two months on fears of a supply glut and waning confidence in OPEC’s resolve to withstand pressure from the US to keep pumping. Negotiating an agreement on any cuts will be a tough task in itself, but then comes the hard job of selling the plan to investors, who will be seeking a trading signal in every word uttered.
In Falih, the coalition has a spokesman who analysts say has grown adept at speaking the language of hedge funds and money managers to clearly signal his country’s, as well as OPEC’s, intentions on oil policy — though US President Donald Trump’s penchant for tweeting criticism complicates matters. “What [Falih] has done very well through his dialogue and his attempts to understand the oil market is that his messaging is sharper,” said Helima Croft, global head of commodity strategy for investment bank RBC Capital Markets. “Now, there are circumstances beyond his control, and he’s had to evolve quickly.”
Consensus within the OPEC/non-OPEC coalition is growing for a cut, which the fundamentals suggest will be needed to stave off an oversupply in the first half of 2019, several ministers and delegates have said. But there is yet to be any firm agreement on how much to cut, nor how to allocate quotas. Officials have cited market forecasts showing a surplus of 1 million to 1.4 million b/d in the months ahead.
However, Saudi Arabia remains under pressure from Trump to keep oil prices low. The kingdom is still trying to manage the international fallout from the murder of US-based dissident journalist Jamal Khashoggi, which likely weakens its hand in negotiations. The country is also facing discontent from fellow OPEC members who blame Saudi Arabia for a production surge over the last few months that has contributed to the price slump.
The Saudis may need to get creative in how they spin an agreement to convince the market of its seriousness in addressing the looming supply glut, while satisfying Russia, the US and its OPEC counterparts.
SPEAKING THE SAME LANGUAGE: It was only a year and a half ago when Falih learned the hard lessons of speaking inartfully to the market. At OPEC’s May 2017 meeting, when the organization was debating whether to extend the production cut agreement that had been in place since January, Falih told reporters that the coalition had not negotiated nor even discussed how the cuts would be eventually unwound.
“We don’t intend to exit so there is no exit strategy,” he said, which traders interpreted to mean that an all-out market share battle could resume once enough members saw no more value in cutting production. Prices tanked more than 4% immediately after the meeting — and almost 13% in the month following — even though the coalition delivered on a nine-month extension of the cuts that ministers, including Falih, had signaled weeks earlier. Saudi officials did not respond to requests for comment, but Falih in recent weeks has indicated his awareness of how quickly market speculators can flip sentiment.
“What we have to deal with is No. 1, the oil industry is driven more by sentiment and by financial markets than it is by fundamentals,” he said at an OPEC/non-OPEC monitoring committee meeting last month in Abu Dhabi. OPEC Secretary General Mohammed Barkindo has been central to the organization’s efforts to understand traders, making it a priority for OPEC to engage with hedge funds and financial players, in ways that its previous leaders have not necessarily emphasized. While OPEC officials in the past have certainly understood the impact of money managers on oil prices, the current group of officials is much more sophisticated in dealing with and messaging to them, said Ed Morse, global head of commodities research at Citigroup, who helped set up some of Barkindo’s meetings with hedge funds.
The challenge for OPEC is that traders can react faster to changing market conditions than member countries are able to. Production policy has to grind through bureaucracy, while the market can turn on a Trump tweet or some geopolitical headline in seconds. “The money managers are significantly more adept and changing their positions than the officials are in making their decisions, so it is inherently an unbalanced relationship,” Morse said.
Barkindo told Platts that OPEC would continue to meet and dialogue with the financial community. “Today the commercial players in the financial market have become key stakeholders in the evolution of the market,” he said. “When you sit with them sometimes, you wonder if they are on this planet or another planet. Even their language is so complicated, but we have to understand each other.” Platts.com
