Oil Man Who Foresaw Crash Sees OPEC Uniting in Self-Interest

EghtesadOnline: OPEC members need to stop bickering over output curbs or risk the group becoming irrelevant to global oil markets, according to an analyst who predicted the biggest price crash in a generation.

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14 November 2016

It’s in the interest of all producers to reach a deal that’s aimed at stabilizing prices, which are 61 percent lower than their 2014-highs, said Gary Ross, executive chairman at PIRA Energy Group. A failure to implement an agreement could drag down crude to as low as $35 a barrel, while success at the group’s meeting later this month may push oil to $60, more than 30 percent higher than current levels, he said.

According to Bloomberg, crude slumped below $45 a barrel earlier this month amid concern over the ability of the Organization of Petroleum Exporting Countries to implement a deal to cut production for the first time in eight years. Key members Iran and Iraq argue that they should be exempt from output restraints while non-OPEC nation Russia has said it would be willing to freeze supply if the group can agree on reductions. Ministers will meet in Vienna on Nov. 30 to decide how they will share the burden.

“OPEC has to reach a deal to become relevant again,” Ross said. “Our view is that they will cut and I think when push comes to shove, they will collectively agree on November 30.”

Prices may retreat amid “relentless global supply growth” unless OPEC enacts significant production cuts, the International Energy Agency said Thursday. While theelection of Donald Trump as the next U.S. president isn’t a key driver for the group, it could put pressure on its members to reach a deal, according to Ross.

The producer group will probably be able to get members to agree because they all need higher oil prices, he said. As oil prices plunged from more than $100 a barrel to a 12-year low of less than $30 a barrel in January, No. 1 OPEC producer Saudi Arabia has drawn on its currency reserves to cushion the impact. It spent $115 billion last year and is also planning to sell a stake in its state-owned oil company.

Saudi Arabia’s credit default swaps -- contracts to insure its debt against default for five years -- have more than doubled to about 1.47 percentage points from 0.63 point two years ago. The cost of insuring fellow OPEC member Nigeria’s debt for five years has jumped to 5.33 percentage points from 2.79 points two years ago.

Venezuela, meanwhile, is swapping debt to reduce its near-term payments. Food and energy shortages have spurred calls for a vote to recall President Nicolas Maduro, and traders are pricing in a 91 percent probability the cash-strapped Latin American country misses payments in five years.

“They’re all trying to do what’s in their self-interest, which is trying to cooperate to go ahead and see that OPEC is successful,” Ross said.

OPEC held technical talks at its Vienna headquarters on Oct. 28 aimed at finalizing the details of a September agreement in Algiers to curb output to a range between 32.5 million and 33 million barrels a day. The meeting ended without reaching a deal on quotas for individual members. That prevented an accord with non-OPEC nations the following day.

Market Mess

The group “messed with the market” during its Algiers meeting in September as the proposed deal to cut output pushed prices higher, only for them to drop again because of the inability of members to resolve their differences, Ross said.

Brent crude, the benchmark for more than half the world’s oil, was little changed at $44.82 a barrel on the London-based ICE Futures Europe exchange by 1 p.m. Singapore time. West Texas Intermediate, the U.S. marker, traded at $43.39 a barrel in New York.

If they succeed at this month’s upcoming meeting, the world may see a supply reduction of 500,000 barrels a day over the first half of 2017, according to Ross. “This would accelerate rebalancing of markets, accelerate the reduction in global surplus stocks and could even eliminate most of the surplus stocks by beginning of the second half of the year,” he said.

Without a decision on output cuts, the market’s rebalancing could be delayed by a year, Ross said. He estimates “very strong” global demand growth at 1.9 million barrels a day this year and 1.6 million barrels a day for 2017, supported by consumption in Asian countries including China and India. “OPEC wants a $50-$60 price, and they want to basically accelerate the rebalancing,” he said.