Jawboning Higher Oil Prices

This article was published by The McAlvany Intelligence Advisor on Wednesday, February 17, 2016:  

The art of jawboning has gotten such a bad reputation that even the Securities and Exchange Commission website decries it:

We deride “jawboning” as (a) government wagging a finger at business and labor to act with restraint, while government acts without restraint; or (b) government asking labor and business to do what is against their self-interest and in the public interest, which is usually ineffective, and when it works it rewards the greedy and penalizes the patriotic.

It used to work by issuing an implicit threat to accomplish a desired end. And on Tuesday, in the first few minutes of trading, traders of both stocks and oil bought the threat, causing prices to bounce higher at the open but then fade afterwards.

The threat was this, issued by the Russian Ministry of Energy following a brief meeting of worthies from Russia, Saudi Arabia, Qatar, and Venezuela:

The four countries … are ready to freeze oil production at January levels if other producers join this initiative.

That statement was so filled with caveats, exceptions, and quid-pro-quos as to be utterly worthless. First, a freeze isn’t going to do anything about the oil glut that is growing by an estimated 2 million barrels a day. What is really needed is a cut – a massive cut – in production, in order to sop up that surplus and bring supply and demand back into some kind of balance. Only then can the price of crude begin to recover.

Second, those 13 “members” of the OPEC “cartel” are actively seeking their own best interests. Getting them to agree on an enforceable restriction on their production is about as likely as Cruz and Rubio agreeing to give up their campaigns and urge everyone to support Trump.

Iraq is fighting a war for survival and needs every dollop of oil it can squeeze out of the ground to pay for it. Iran is enjoying its freedom from sanctions that have decimated its oil export industry, and has announced with great glee that it has already increased its daily production of crude by 400,000 barrels, on its way to its goal of an increase of 1.5 million barrels a day by the end of the year. For emphasis on Monday, it offloaded three tankers filled with crude headed for European ports, the first since sanctions were lifted in January.

That the rally was phony was picked up immediately by numerous observers, including Edward Bell, a commodity analyst at Emirates NBD (the merger of Emirates Bank and the National Bank of Dubai in 2007), who said the proposed agreement “does [no]thing to combat the overriding issue of oversupply.” Energy Aspects analyst Dominic Haywood agreed:

I don’t think [the agreement] will have a huge impact on supply/demand balances, simply because we were oversupplied in January anyway. We’re just even more oversupplied now.

CMC Markets analyst Jasper Lawler agreed: “The output freeze is disappointing because it’s not an outright cut, and with Iran not part of the meeting it’s still a bit far-fetched to think this is a precursor to a future cut. Iran’s absence from the meeting means that overall OPEC output should still rise.”

What the announcement does illustrate is how willing those with opposing interests are to try to work together to juice crude oil prices higher. Riyadh cut off diplomatic ties with Iran in January after its embassy was set on fire following the kingdom’s execution of a prominent Shiite cleric, Nimr Baqr al-Nimr. And Russia and the Saudis are supporting opposite sides in the Syrian civil war.

The agreement was a complete waste of air time and newsprint, but it does show the extraordinary damage low crude oil prices are inflicting on counties whose only (or main) source of income is energy exports. It shows how enemies can become friends for day when their very existence is at stake.

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Sources:

History of jawboning

Barron’s: The Cudgel of Samson: How the Government Once Used ‘Jawboning’ to Fight Inflation

The Wall Street Journal: Saudi Arabia, Russia, Qatar, Venezuela Agree to Freeze Oil Output at January’s Levels

The Wall Street Journal: Iran Says It Won’t Join Immediate OPEC Production Cut

MarketWatch.com: Iran readies more oil shipments to Europe

Reuters: Oil gives up gains after Saudis and Russia agree output freeze

The New York Times: Russia and 3 OPEC Members Agree to Freeze Oil Output

MarketWatch.com: Tuesday chart of NYMEX crude oil price action

The New American: Venezuela Could See Hyperinflation, Economic Collapse

The New American: As Oil Price Drops, Iraq Faces Existential Threat

The New American: Crude Prices Likely to Drop Further After Iranian Sanctions Lifted