More and more market watchers are making the case that OPEC should just leave well enough alone and let the free market set the price. While trying to influence sentiment and fundamentals, on nearly a daily basis, OPEC has already destabilized the market and guarantees more uncertainty ahead.
Markets are shrugging off OPEC headlines, with prices weakening and hedge funds liquidating long positions. The cartel may be missing the mark on its stated longer-term goal of stabilizing the market and preventing a catastrophic correction.
Despite constant chatter of rebalancing, oil prices have been weakening, and OPEC has itself to blame for causing market uncertainty and instability.
A large stock build in the first quarter, rampant producer hedging, and large amount of investor inflows in the futures market created an “unbalancing of the market,” the opposite of OPEC’s stated goal, according to one prominent oil market analyst.
The biggest questions at CERAWeek this year is whether OPEC and its non-OPEC counterparts will recommit to throttling back in May and whether U.S. shale can fully offset these cuts and push down prices.
OPEC has certainly put a floor under the market, but it’s not yet clear how high members can push prices. Oil may simply trade in a range of $45-$60, with shale capping prices on the upside and the cartel's production cuts limiting the downside.
When prices were high, OPEC members benefited from any speculative-driven rally. Now, however, the tables have turned—OPEC members, already suffering from low prices, are jittery that speculators will sell the market down again toward previous lows.
Widespread hedging among U.S. producers and OPEC increasing its volumes even as some members deal with unexpected supply cuts have the potential to cap prices, or possibly bring about another leg downward.
OPEC policy, fresh data from agencies such as the IEA and the EIA, price speculators, and geopolitical disruptions are all known as market movers. But there’s another important player in oil price movements, and that’s the Federal Reserve.
The oil markets have had a crazy beginning to 2016. Prices have plummeted to the lowest levels in 11 years, and it’s hard to identify anything likely to turn the market around in the near future.