By now, we are all used to commodity markets lunging randomly whenever news breaks of some real or imaginary event that might possibly add or subtract a barrel of oil from the marketplace. Many market players use the phenomenon to further their self-interests. It’s a tiresome game but like anything in life, if there’s a loophole or sneaky tactic that works, someone will be there to exploit it. And no one is better at manipulating the media than OPEC.
The latest chew-toy that’s enthralled the simplistic mass-market energy media is OPEC’s mulling a possible “production freeze” as a means of bringing an end to low oil prices. After decades of listening to OPEC jerk the global media this way and that as part of whatever scheme they are up to, one would hope the commentators would become a bit more discerning. But no, they continue to mindlessly trumpet whatever OPEC has to say. Although to be fair, Russia has now entered the ring, apparently on the same side as the Arab dudes, which does add a depth of character not unlike professional wrestling. The analogy sounds crazy until you hear them speak.
The notion of a production freeze was first bandied about by Saudi Arabia a few months ago as that nation’s ruling circle nursed the closest thing to a hangover they’ll ever know. The end of their fifty-year oil-fueled party caused the headache, where intoxication was derived not from alcohol but from every garish uber-luxury known to man. Purveyors of the world’s finest goods incredulously discovered that petro-dollars would pursue, with a vengeance, any object admired by the masses with the exception of bacon. The crazed spending habits however are now slowing as the oil price collapse takes its toll. Saudi Arabia is not quite yet destitute; a nation with $500 billion in reserves is not broke, but when the loot pile was $800 billion a few short years ago the trajectory is not good. Even well-placed princes give pause before checking the “diamond-encrusted engine” option box. (But they still do it.)
Regardless, the phrase “production freeze” has entered the global lexicon as Saudi Arabia tried to figure out a way to get the point across that Iran’s re-entrance into world markets was being managed. That is the only context where talk of a freeze makes sense; otherwise the mutterings would have been of a production cut. A production freeze for the rest of OPEC is a meaningless concept; most member states are more worried about peasant uprisings than launching new production schemes (though the designation “peasant” is becoming aspirational in much of OPEC, leading to confusion in uprisings).
No other nation is pondering bringing on significant new production; Saudi Arabia is the only country that claims to have additional spare capacity it can bring on at will. This in itself is a nonsensical claim; the Saudis have been drilling at record levels to drive down prices and quash development of more expensive (and large) resources such as the oil sands or shale oil. If Saudi Arabia did indeed have that much production firepower readily available, they surely would have used it to accomplish their goal – they are obviously trying to flood the market based on how hard they are drilling, but have only succeeded in slightly bloating it, which is why this whole drama has been going on for two years. If the Saudis really did have that capacity available, they would have turned on the taps and crushed the market fully within a year of their master plan.
The most majestic absurdity of the situation was Russia entering the discussion, hinting at working with Saudi Arabia to bring about the “freeze”. Russia doesn’t play well with anyone, and as an ally is about as reliable as a crackhead. Russia is currently friendly with Iran (in the same sense that a pimp is friendly with his staff), while Saudi Arabia would happily boil Iran in oil (there is much speculation that Saudi Arabia lowered the price of oil solely to punish Iran, which is possible but runs counter to them standing by while Iran ratchets up output). Since the Russians and Saudis each comprise over 10 percent of world output, either could easily erase the glut in short order by themselves, but why do that when all you need to do is hold press conferences and speculate about a theoretical collaboration?
At any rate, speculating on Middle East politics is the same as reading poetry to fighting dogs, so best to stop pondering motivations and start tempering rational expectations. What’s worth examining is the potential impact these “production freeze” discussions have on anything besides headline space.
And the answer is no impact whatsoever. OPEC could theoretically reduce output in order to prop up prices, or at least threaten to, as it has done in the past with some success (thanks mostly to media coverage of those equally dumb statements; SA rarely cuts production meaningfully to prop up prices despite threatening to dozens of times). A production freeze would have impact if production was growing globally, but nowhere does that seem to be a particular problem.
This isn’t to say that OPEC is powerless; they could in theory dramatically increase prices by shutting in material production levels until the global surplus evaporated. But they don’t, because every other producing nation is going broke hand over fist and the Saudis have enough cash reserves to ride out the storm. (Probably, depending on how much the lavender panda fur interior option is in the forthcoming new Bugatti.)
So a production freeze might get a lot of headlines, but it’s nothing more than a bit of noise to entertain the media and provide volatility fodder for traders.