Daily Management Review

How can OPEC regain market's trust?


OPEC member producing countries made it clear that their promise to "do all what it takes" to restore the balance in the oil market does not imply a deeper decline in production. In this case, it is time to switch the market's attention from the management of extraction to export management and let the market monitor how the agreement is being executed. The approximate observance of the terms of the agreement on the limitation of production did not contribute much to the growth of oil prices. Of course, the current price of Brent in the $ 55 per barrel area is much better than $ 28, but for a year and a half before the crisis, oil cost about twice as much.

While oil reserves are declining in developed countries, in general they remain at a high level throughout the world. According to the latest data of the International Energy Agency, world oil reserves had been growing during 13 quarters in a row and only in the second quarter of 2017 growth was replaced by a decrease. However, this is only an isolated case, and stocks will continue to rise in the current quarter and then most of the next year.

According to the IEA forecast, OPEC countries are already producing more oil than the world will need in the next year, and the extension of the production limitation by the end of 2018 will not solve the problem unless the demand next year is significantly higher than the forecast. This is certainly possible if we take into account the events of the beginning of this year. The oil-producing countries, apparently, are not yet ready to go to a more serious reduction in production. But what else can they do?

They can solve the problem of trust. OPEC production data are not transparent, they are not independently verified and often do not reflect the volumes supplied to the market. This confirms the difference in the estimates of the extraction of individual countries. Even OPEC, it seems, does not believe in the volume of production provided by members of the cartel. Within the limits of the production limitation, the volume is estimated as the average value derived from the six "independent" production estimates, not on the basis of official data provided (or not provided) by the member countries of the cartel.

These independent estimates are, at best, approximate. As a result, traders have no reason to either believe in declarations about the decline in inventories, nor increase the price of oil to reflect the reduction in supply. The most obvious way to solve this problem is to make the reference point for the transaction what is really important, that is, the amount of oil that is supplied to the market. In other words, exports. It is common knowledge that tankers come to the ports of the producing countries and take on oil. Dozens of companies, including Bloomberg, control movement of these ships with some degree of accuracy. In a number of cases, disputes can only evoke details.

Thus, if OPEC wants the market to believe in a decrease in supplies, it has to demand an agreement to limit production to only one: published, transparent data on the transportation of crude oil and petroleum products, their volumes and types. The market does not need information about the buyer companies, nor about how much they paid, nor about the destination. You just need to compare the data on oil supplies and the movement of tankers that are already being tracked. It will not be difficult and should not even cause questions. Companies operating at sea terminals already have this information, and some of it is already available in the right form. For example, the US Customs has detailed information on each cargo ship that comes into the country.

It is difficult to understand what the oil exporting countries would have lost. The market is known for ships that are loaded on export terminals. The market can approximately estimate the volume of oil and oil products that are loaded on them. Telling the market how much and what actually is on each ship, OPEC will achieve such trust, which has never happened in the history of the organization. For several decades the oil ministers of the OPEC member countries have argued that oil is too important a commodity and it is impossible to let the market manage the balance of supply and demand. If it is really so strategically important, then there is a need to make the export market transparent.

source: bloomberg.com

Science & Technology

China is developing technology to capture greenhouse gases

IEA: The growth of renewable energy is slowing

Google introduces new smartphone and beta Android Q

SpaceX’s Dragon Crew Capsule Test Met With Anomaly

New Security Study Finds Millions Use 123456 As Password For Email Accounts

The Devastating Panama Disease Could Spell Extinction For Bananas

Walmart to hire 4 thousand robot cleaners

Samsung Galaxy Fold: Expensive but fragile

USA and South Korea launch the first commercial 5G networks

Deliveries of AR/VR devices to grow by 54% in 2019

World Politics

World & Politics

Theresa May to resign on June 7

The Earth Is ‘Not On Track’ To Tackle Global Warming: The U.N. Secretary General

Is Finland’s aging population turning the country into Japan?

The United States will impose new duties on Chinese goods on Friday

Jyrki Katainen: EU is not a milk cow

Oil lobby and the planet's future

Trump files a lawsuit against Deutsche Bank and Capital One

Trump Urged Abe To Influence Japanese Auto Firm To Produce More Vehicles In The U.S.