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25-05-2017

OPEC's Cutback Efficacy Questioned Prior to Vienna, Analyst Describes Its Medium Term Pricing Power as "Zero"

However, other analysts say at least the cartel won't be harmed by the proposed sale of U.S. reserves.

As members of the Organization of the Petroleum Exporting Countries (OPEC) prepare to voice their formal support for an extension of their oil output reduction agreement in Vienna on Thursday, a final wave of critical analysis portrays the cartel's attempts to date as having had a minimal impact on the market and the cartel itself as having zero medium term pricing power.

While crediting OPEC for achieving a "remarkable turnaround in market sentiment and hedge fund positioning from very bearish....to very bullish," John Kemp, senior market analysts, commodities and energy for Reuters, suggested on Wednesday that Brent futures currently trading around $7.50 per barrel higher than before the OPEC cuts were announced may be a bit misleading, since "front-month prices had already risen by more than $18 per barrel over the 10 months prior to the last OPEC meeting.

"There is no prima facie evidence that OPEC and non-OPEC production cuts changed the previous trend in prices."

And while Kemp notes there is some evidence the cartel's last meeting had a short-term impact on prices in the weeks leading up to it and immediately afterwards, "there is less evidence that it had a persistent impact on oil prices that would not have occurred otherwise if market forces had been left to play out on their own ... the rise in oil prices over the last year might be attributable to a normal cyclical recovery as much as OPEC action."

Kemp warned that the lack of an unambiguous price impact from the output cuts to date "should serve as a warning about over-emphasizing OPEC at the expense of structural factors in the oil market."

Meanwhile, when questioned by CNBC on OPEC's efficacy in controlling the market, Michele Della Vigna, commodity equity business unit leader in EMEA for Goldman Sachs, said the cartel "matters for the inventory path in the next six months" but its "medium term pricing power [is] zero" due to the remarkable comeback of U.S. shale.

Vigna also speculated that Thursday will see a mere extension of cuts rather than deeper cuts, but he conceded that OPEC "could surprise with deeper cuts."

Other analysts note that OPEC also faces an imminent threat from the U.S. in addition to rising shale production: president Donald Trump's proposal unveiled earlier this week to sell 270 million barrels of oil from the Strategic Petroleum Reserve over the next decade in order to trim the national debt.

Phil Flynn, senior market analyst at Price Futures Group, said, "For OPEC, it could be a problem because they're doing everything they can to drain inventories."

But Goldman Sachs disagrees, believing instead the sale would strain logistics on the Gulf Coast where most of emergency stockpiles are located; the bank added that there's "high uncertainty on whether such a measure will be adopted."

At best, the mood of analysts in the final hours before OPEC's Vienna meeting is lukewarm, and figures reported earlier this week by the International Energy Agency concerning the global market haven't helped: the agency calculates that inventories in industrialized nations totaled 3.025 billion barrels at the end of March - about 300 million barrels above the five-year average. 


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