December 1, 2016
If OPEC were a poker player, it would be pretty happy with how it has played its hand in 2016. In January the oil world was suffering from the systemic after shock of the 2015 meltdown as prices went below the US$ 30 level.
OPEC is often described as a cartel, manipulating oil prices by controlling output to an oil-dependent world. It turns out that there is more than one way to skin a cat, and manipulation of the market has turned out to be not only relatively easy, but highly fruitful to producers.
OPEC has talked, and it has talked a lot. Venezuela has been the driving force of these talks, with the Saudis popping in for a chat on production cuts every now and then, causing a mass of hysterical buying in the market every time prices drop a little bit too low for their liking.
The reality is that oil has spent 2016 driven by sentiment and has paid little or no attention to fact. The fact is nothing had changed for OPEC since the beginning of the year, except for bluster and threats of production cuts.
Some 11 months later and the market has been getting weary. Brent futures have recently traded US$10 off their highs, money managers and trading houses have seen the weakening in the upward move and have once again been taking the market on from the sell side. Et voila! OPEC, having managed to talk the market up has had to show its hand, resulting in the first production cuts in eight years. Could the market have known that this was coming and is the market confounded?
The answer to this is never play poker against a player holding two decks. Most of OPEC wanted to see a production cut; however, geopolitical tensions have resulted in competition for market share, and subsequent pressure has kept a lid on any chance of a runaway bull trend. This had not been lost on the non-commercial side of the market, growing ever confident about OPEC’s inability to act as a cartel any longer.
As we hit US$ 44.00 two weeks ago the OPEC band wagon started telling the ever-sceptical market that they were getting closer to an agreement. Gamblers play the odds and fund managers – sceptical as they may be – started reducing positions, forcing prices higher. However the reality the market wasn’t listening enough and missed the all-important signs that the cut was coming.
The Commitment of Trader’s report (COT) that is published weekly would suggest that OPEC was clearly ready to pull out the second pack of cards. The commercials (the producers) are long the market, whilst the paper players are short. The cartel that has talked a lot about cutting decided they were going to do so, and they made sure they were well placed in the market before they did so.
So what does this mean for 2017?
It’s a game changer, the cards were called and not surprisingly the winning hand had a royal flush. OPEC has made a massive commitment to being the credible powerhouse it once was. And in the process it has punished the market that had taken it on.
2017 is laid out in OPEC’s favour, all it needs to do next year is talk the market up, and nothing has changed. The rhetoric will be for bullish prices, and those betting against the greatest card sharks in town will need to have big pockets to take them on.
For the money managers, currently licking their wounds as oil prices once again rise, there is a lesson, one that OPEC is not going to let them forget. OPEC is the house and as we know, the house never loses.