OPEC MEETINGS MEAN NOTHING

OPEC MEETINGS MEAN NOTHING

Andrew McKillop

June 2011

The June 8th OPEC ministers meeting in Vienna was a classic in its dying genre: the ministers moved on to doing the only thing they can do: shout a little, shuffle reports and do nothing.

To be more than 100 percent sure however, this isnt how we are told to look at these events. The press, media, oil “experts” and politicians of the big oil consumer countries tell us that OPEC meetings somehow set or fix oil prices, just like that. And since economic mythology says that high oil prices are bad for consumer society, higher prices can make airlines can go bankrupt or further into bankruptcy, car drivers will use their cars less, our plastics, pizzas and pesticides will cost more to produce, comsumers sulk, their morale slides and they will spend less.

Therefore a good OPEC meeting ends with prices going down, and a bad meeting ends with rising oil prices. The June 8th meeting was bad: prices went up, after, because Saudi Arabia’s demand for bigger output from all members did not get majority approval. By June 10th the Kingdom said that even if other OPEC members didnt like it, especially the Bad Cartel of Iran, Venezuela, Nigeria, Algeria and Angola, it was going it alone, could produce more, would produce more. As a result, oil prices fell.

KEEPING THE MYTHS ALIVE

In official economic mythology but not in practice higher oil prices are bad for business, so equities will be marked down if prices rise after a bad OPEC meeting. This could have been a nice theory, 20 or 25 years ago but this model is now totally outdated. Any day oil prices rise and in fact, the DJIA, Dax and Nikkei stock exchanges will also rise, around 3 times out of 4. Any day oil prices fall, so will stock exchanges, at least 3 times out of 4.

The only trick needed for staying trader-credible is to turn around the chicken and the egg: you say that oil prices rose because the DJIA, Dax and Nikkei went up, first, and oil declined because they go down. Not the other way round.

The biggest Mother Myth is simple: OPEC ministers determine, fix or set oil prices. The jury can only be out forever on this question, for a host of reasons but whether it is true or not is a question on which the main interested parties, oil traders, are calculatedly and interestingly ambivalent. They will say that for years, maybe decades the ritual get-togethers of OPEC ministers are only a handy peg on which to hang market sentiment, and turn-arounds of market sentiment. If the traders get the direction right they make money, and otherwise not.

They usually do not add these meetings are only a handy peg for sentiment because other market players, much nearer home, are the real oil price fixers.

What powerfully sets oil trader sentiment are new oil market rumours – called outlooks, viewpoints and comments – from players like Goldman Sachs Group Inc., able to marshall and play hundreds of millions of dollar on a single day’s oil price bets. The views, opinions, rumors, spin or propaganda basically hang on coming shortages, or temporary reprieves of shortage in an always tightly balanced market. Keeping prices moving this way and that is the best way to make a killing – above all when the competition bets the wrong way.

Geopolitical specialists get a look-in because the so-called “geopolitical risk premium” on a barrel of oil can attain $ 30, although nobody can prove it, as this slippery premium measures how much more you have to pay for oil from a risky country that could blow up almost overnight, like Libya. For the geopolitical snake oilers, OPEC meetings are a struggle between good and bad OPEC, pitting diehard terrorist-funding fundamentalist Islamic countries, Iran that is, aided and abetted by Venezuela, with June 8th allies in the shape of newly dangerous Algeria and other Bad Boys including the Gaddafi delegation from Libya, against the West’s friends.

FUNDAMENTALS ?

Geopolitical risk premiums put the fun back in fundamentals – and fundamentalism. On June 8th, the West’s friends were the Libyan delegation of the anti-Gaddafi rebels, fundamentalist Islamic Saudi Arabia and its minority ruled, anti-democratic Gulf partner countries. The West’s enemies at OPEC meetings always include fundamentalist Islamic Iran, but surprisingly enough, from one meeting to another, friends and foes can change the musical chair they talk from, also changing their colours and quota production tunes.

Terror-friendly producers can suddenly become consumer-friendly, demand higher export quotas, and produce like they already had cartel approval. The West-loving friendlies will not too rarely decide to cut back on oil output, because they also want higher prices. These turn-arounds are manna for cobbling new rumors, extending old ones and staying quotable on Bloomberg or Reuters business news, but do you think that may relate to supply and demand fundamentals ?

The real supply-demand situation at any one time is so opaque we dont need OPEC to guess we can’t and won’t guess what it really is. OPEC ‘s small technical and research division or grand-sounding Secretariat, mostly staffed by political appointees, is unable to compile coherent data on oil production and export capacity, stocks, national oil demand, average prices, refinery capacity, shipping data, contract conditions or anything else it is forced to pretend it can do. What it does is make heroic attempts. It produces nice documents often cut and pasted straight from publications on oil and energy from the IEA (International Energy Agency) or the USA’s lookalike agency, the EIA. Even better, these last two agencies cut and paste from OPEC Secretariat reports, to keep things whirling in the world of oil market statistics, data and reports. Fundamentals based, of course.

GIMMICKS TO THE RESCUE

The basic role and function of the IEA and EIA is – or was – to give the ammo needed for talking down oil prices. The IEA’s founders, president Nixon and Secretary of State Henry Kissinger, explicitly thought of it that way – a propaganda shop – and a second best from what they really wanted to do in 1974. This was very simple and delightfully radical: invade Saudi Arabia, take control of its oil, and ship it back to the USA and to European, Japanese and South Korean allies. Information on world oil from Nixon and Kissinger’s IEA was therefore set as carrying heavy spin able to feed the right stuff rumors: those which drive down oil prices and make the OPEC members break ranks on quotas.

The IEA and EIA, still staffed and paid by the world’s largest oil importer countries of the OECD, now have a transparent need to push new energy policy fads and gimmicks. Through 2007-2009, until the December 2009 Copenhagen climate summit rout, both were pushing Global Warming like the Mayans pushed Apocalypse 2012, a few hundred years back. Today, the range of energy gimmicks, gadgets, fads and foibles pushed by the IEA and EIA would make Nixon turn in his grave (and could make Kissinger groan at a Bilderberg meeting) because most of these New Energy ideas need high oil prices to work. Even without global warming, both these agencies are high on renewables, carbon credits and nuclear power – at least until March 11h, 2011.

The IEA and EIA can therefore be counted on to deliver scary outlooks on declining OPEC export capacity and tensions between good and bad OPEC members inside the cartel. Just as predictable, the OPEC Secretariat will try to prentend that isnt the case. Both are lying.

On the horizon but coming quite fast, we can note, both the IEA and EIA have a new patron saint: shale and fracture gas. This is abundant and is a New Solution for world energy, when oil gets so rare we will not not need OPEC meetings to see where prices are going. While this one-liner has yet to slip out the mouth of a Saudi spokesman, as far as oil goes you can’t afford it if you have to ask the price !

COPYRIGHT ANDREW MCKILLOP 2011