The Fuse

OPEC’s Roller Coaster Ride

by Matt Piotrowski | November 28, 2017

OPEC’s interventions over the past three years have caused oil prices to go on a roller coaster ride, reflecting the cartel’s outsized influence.

As OPEC and its non-OPEC allies gather in Vienna this week, it will mark the three-year anniversary of the cartel’s pivotal decision to produce all out and allow prices to fall sharply. The decision at the time was mostly unexpected and injected massive uncertainty and volatility into an already skittish oil market. Even though OPEC has shifted its strategy and goals since then, uncertainty remains and will likely persist. OPEC’s interventions over the past three years have caused oil prices to go on a roller coaster ride, reflecting the cartel’s outsized influence and its desire to manipulate fundamentals for its benefit, now and in the future.

November 2014 Meeting

After OPEC decided not to intervene in November 2014 to halt the sharp price slide, disorder followed. The oil market continued to fall and dipped below $30 per barrel in February 2016 as OPEC members competed for market share and sustained high output to undermine shale production. Although OPEC countries hurt economically from weak prices, the strategy paid off: U.S. shale output fell by more than 1 million barrels per day from April 2015 through September 2016. And global demand growth soared as a result of low prices, slowing efforts to improve fuel efficiency and move away from oil.

April 2016 Doha Meeting

Once U.S. shale production was clearly struggling, OPEC began to discuss manipulating supply to increase prices. In April 2016 in Doha, OPEC, along with Russia, sought to freeze output. Talks broke down when the Saudis insisted that Iran participate in the deal even though it was ramping up supply after sanctions were lifted. Even though OPEC and its allies failed to finalize an agreement and many pundits said the cartel was “dead,” producers set the groundwork for later in the year when they eventually struck a deal. And to their benefit, despite no deal, oil prices were rising as a result of the cartel’s verbal intervention and the market tightening from falling shale output and stronger demand.

September 2016 Algiers Meeting

In late September, at a meeting in Algiers, OPEC pledged to cut production to a target of 32.5-33 mbd, and prices rallied by six percent in one day on the news. The deal was not yet formal, but OPEC felt emboldened by its success in jawboning the market higher and the anticipation that it would finalize the agreement. The meeting also signaled a major shift for Saudi Arabia and Iran, two adversaries who put aside differences in order to cooperate on production cuts.

November-December 2016 Meetings

Not only did OPEC follow through on its commitment made in Algiers to cut production at its November 2016 meeting, the first agreement in eight years. It also successfully brought in producers outside of OPEC—particularly Russia—to more decisively influence the global oil price. OPEC and its non-OPEC allies, starting at the beginning of 2017, have cut production by 1.8 mbd, or 2 percent of global supply. Despite doubts, compliance has remained high in 2017, reducing the inventory overhang and increasing prices.

OPEC has been largely successful in meeting its goals. Capex was cut significantly for two straight years, and now prices are rising again.

OPEC’s actions—and shifts in strategy over the past few years—have appeared contradictory and haphazard. Its members have suffered from low prices and have, at times, seemed to have lost control of the market. While those points are true to a certain extent, OPEC has been largely successful in meeting its goals. In 2015-16, some $345 billion in upstream spending was wiped out. That development increases the likelihood of a price spike in the coming years and gives OPEC greater control over the market for the longer term. Meanwhile, against the backdrop of the shift in policy, prices have rebounded to above $60 per barrel—up approximately 44 percent since June. Moreover, market participants are closely eyeing developments in Vienna this week, reaffirming the cartel’s influence over the global oil market. OPEC and its non-OPEC partners appear poised to extend the cut through the end of 2018—but they lack a credible exit strategy and remain worried about the resurgence of shale.