Oil traders punish OPEC for promising too much

As OPEC’s latest meeting wrapped up in Vienna on Thursday night, ministers congratulated each other on its rare spirit of amity and consensus. The talks were, without a doubt, a success.

But two hours later, one veteran delegate was staring in despair at the numbers flashing red on his smartphone showing crude down some 5 percent to $51 a barrel.

“That is a disaster,” he said.

While OPEC has worked hard in recent years on improving communication to ensure the right message is delivered to financial markets, Thursday’s experience showed the 14-member group and its non-OPEC allies still have a long way to go.

The problem was not what was delivered, but what appeared to have been promised beforehand, industry analysts said.

OPEC agreed on Thursday to extend its existing production cuts by nine months – more than the initially suggested six months – in tandem with non-OPEC producers, including Russia.

But hints from the group that it could deepen supply cuts, extend them by as long as 12 months, curtail exports and tell the market how exactly it would terminate supply curbs in 2018 had raised market expectations much higher.

“OPEC oversold the meeting to the market way too early,” Amrita Sen, from the consultancy Energy Aspects, told Reuters in Vienna.

The market reaction was all the more disappointing given that from OPEC’s perspective, the meeting went very well.

“I have been in OPEC close to 20 years. It’s the first time that I witness 100 percent compliance (with cuts) from OPEC and close to 100 percent from non-OPEC,” Iranian Oil Minister Bijan Zanganeh told Reuters afterward.

OPEC’s No.3 producer, Iran has repeatedly clashed in past meetings with OPEC’s de-facto leader, its political arch-rival Saudi Arabia.

Russia, which effectively is fighting a proxy war with Saudi Arabia in Syria, said on Thursday its energy cooperation with Riyadh would last well into the future.

In its statement, OPEC said it could extend curbs further or cut more.

Normally, all this would be more than enough to trigger a bull rally.

“It’s strange. I don’t know why (the market crashed)” Zanganeh said.

Whatever it takes

OPEC and non-OPEC oil producers first agreed to cut output in December 2016 – the first joint deal in 15 years – and said the curbs could be extended by a further six months.

The extraordinary move was aimed at battling a global glut of crude that halved prices from 2014, forcing Russia and Saudi Arabia to tighten their belts and leading to unrest in Venezuela and Nigeria.

The cuts helped push oil prices back above $50 per barrel but also spurred growth in the U.S. shale industry, which does not participate in the output deal. That slowed a rebalancing of supply and demand, with global inventories still near record highs.

As the price fell back towards $47 in early May, near a six-month low, Saudi Energy Minister Khalid al-Falih said OPEC would do “whatever it takes” to rebalance the market, including a longer extension for the output cuts.

“If you declare nine months in advance, people are bound to expect more,” Sen said. Russia also added to the expectations by saying this week that cuts could be prolonged by 12 months.

The market was also disappointed OPEC did not mention its previously stated plan to bring stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion, said Olivier Jakob from the Petromatrix consultancy.

“The December meeting was a breakthrough,” he said. “The meeting yesterday gives us, however, a feeling that OPEC is fatigued by the lack of results so far and does not have a consensus anymore to have the five-year average in stocks as a policy target.”

The fact that Iran, Libya and Nigeria remain exempt from cuts suggested OPEC was not yet ready to take additional measures, Jakob added.

Dave Pursell, managing director at Tudor, Pickering, Holt & Co, a Houston-based bank working with U.S. shale producers, predicted markets would rebalance within six months.

“The market was hoping for deeper cuts,” he said. “But I do think oil prices, three months from now, will be higher than they are now.”