Wednesday, 8 June 2011

OPEC's symbolic quotas

OPEC meetings and the decision on quotas has little more than symbolic value these days when you consider oil production from OPEC has been substantially above quota levels for over two years. The Saudis remain the swing producer and have continued to demonstrate their commitment to meeting incremental increases in global demand. They also have the biggest spare capacity within the cartel. The Saudi's aside, Iraq has been busy ramping up its capacity (2.7 million barrels per day up 15% yoy) and remains unconstrained by quotas. Arguably OPEC discord, as history has shown, is bad for oil prices as it reduces production co-ordination between cartel members and increases the risk of even greater cheating. The real reason oil prices are where they are, as the UN has rightly pointed out this week, is due to herding behaviour of investors and the "go long oil" meme being sold by Wall Street covering every conceivable scenario. Inflation, EUR correlation, risk on, diversification, easy money, and now OPEC discord - the list is long. In the meantime the strain on US (and ROW) consumers, slowing global growth, tightening monetary policy by emerging nations and high stock levels (US crude stocks have never been higher and in terms of days of supply exceed even those in 1998 when oil prices were $10 per barrel) are soundly ignored by the same investors, perhaps due to some selective information disclosure by Wall Street to its investing clients. This trend has little to do with fundamentals and everything to with fanciful marketing. When all the tortured arguments for oil's rally finally run thin, the final justification for the runaway oil price might be to call it a momentum trade. Others might call it a bubble.

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