Opec's failure to spell out its strategy may hit market

 28 May 2017 - 23:47

Opec's failure to spell out its strategy may hit market

Bloomberg

London:  Opec ministers failed in their attempt to convince the market that they have a plan when they agreed to extend output cuts for another nine months. The extension wasn't a problem -- it was the lack of a sense of what comes next.
By the time officials had retreated to their Vienna hotels on Thursday, or fled to the airport, the price of crude had fallen by 4 percent. The extension was supposed to show an unprecedented degree of cooperation between the Organization of Petroleum Exporting Countries (Opec) and a group of non-member producers.
It was meant to demonstrate a commitment to do whatever is necessary to bring inventories down to their five-year average level. But as I noted last week, it's a pale imitation of previous interventions. What the deal lacked, rather than what it contained, proved its weakness. There was no clarity on how the process of rebalancing the market might end. What happens when inventories are back where Opec wants them? According to Saudi Energy Minister Khalid Al Falih, that will be by the end of the year.
 But he clearly wasn't using Opec's own market analysis to make that prediction, because the group is much less optimistic than the International Energy Agency about the drawdown of stockpiles in the second half, based on current production levels.
The fear is that the group will return to the production free-for-all that we saw between November 2014 and the start of this year, triggering another round of excessive stockpiling and another price collapse.
 OPEC failed to address those concerns with any conviction. That's a pity, because it could so easily have done so. As long as the group's own members are prepared to ease their output cuts gradually, there should be little difficulty in unwinding the reductions made by others.
Around one-third of the cuts offered by non- Opec producers came from natural declines that can't be reversed.