A Brief History of OPEC Price Manipulation

A Brief History of OPEC Price Manipulation  - opec 9 29


Gone are the days when OPEC controlled 50% of global oil production. The spotlight has shifted to U.S. shale among others.


That doesn’t sit well with OPEC. In an effort to break the backs of U.S. producers and maintain market share, OPEC as a whole has been pumping record levels of oil in an effort to squeeze these producers out of the market. (Fracking is a more perpetually capital-intensive extraction process and has a much higher marginal cost per barrel to pump in many regions than traditional Saudi plays)


A Brief History of OPEC Price Manipulation  - opec box


Then came the “freeze talks.” OPEC has been talking about cutting or, at least, freezing production at current levels for some time now in an effort to boost prices. The latest oil babble is that OPEC has a “deal to agree to a deal” to freeze production at its next meeting. Make no mistake, oil-rich states like Russia and Saudi Arabia are hurting because of low oil prices, Hedgeye Commodity analyst Ben Ryan said on The Macro Show this morning. These countries have an obvious incentive to boost prices when the time is right (after more production elsewhere comes offline).


“Saudi Arabia’s economy is hurting. You’re talking about a country that receives an estimated 75% of its revenue from oil production. The oil industry contributes between 40-50% of GDP which is more than the entire private sector. The fact that oil prices have gotten absolutely crushed is meaningful. Their budget deficit relative to GDP hasn’t had this drag since the mid-80s. So to suggest that they’re fine with $40 oil is certainly not the case, but they want production to come offline more than anyone then they are more in a position to step in and talk about production cuts.”


Clearly, in the long term, higher oil prices are preferred. But until OPEC members can assert their dominance over modern, non-traditional plays on the global stage we’re skeptical this deal gets done. We’ll see.


The latest news is that Russian President Vladimir Putin – his country is not a member of OPEC – has said that should a deal be signed, Russia will freeze production too. Again, we’re skeptical of this. Russia's largest oil company, Rosneft, said yesterday it would actually increase oil production above 2015 levels. As policy analyst Joe McMonigle wrote in a research note out of the Algiers meeting at the end of September, Russia has a poor track record of cooperating with OPEC on production limits.

All of this raises an entirely different question...


Can OPEC actually control the production of its members and therefore control the direction of prices?


While OPEC sits on ~80% of global crude reserves, OPEC as a “cartel” to be reckoned with, has had virtually no impact on how much crude its members produce. OPEC sets quotas, but its member countries cheated about 96% of the time from 1982 to 2009, according to a study by Brown University professor Jeff Colgan.


A few of the more salient findings:


  • OPEC announcements have an ability to move spot prices for 15 to 20 days. but there is exactly zero evidence OPEC is actually restricting output during this time
  • On average, over this 1982 to 2009 period, the nine principal members produced on average 10% more oil than their quotas supposedly allowed
  • The relationship between oil prices and OPEC quotas is virtually uncorrelated (r^2= 0.15)
  • All but two members over-produced in more than 80% of the months during this period. The exceptions were Iran and Venezuela, which still cheated over 70% of the time
  • There were 22 OPEC meetings in that same period in which quotas were increased, and in 21 cases, the new aggregate quota for the 9 principal member was lower than what those countries were producing a month prior to the change


Whatever OPEC members decide at their November meeting, history suggests everyone will continue to drill, baby, drill. If they still have the funds, of course.


A Brief History of OPEC Price Manipulation  - OPEC market

Guest Contributor: What Does History Tell Us About Trump’s Trade Policy?

Editor's Note: This piece is reposted from the Council on Foreign Relations’ Geo-Graphics blog. It does not necessarily reflect the opinion of Hedgeye


by Benn Steil and Emma Smith


Guest Contributor: What Does History Tell Us About Trump’s Trade Policy? - z benn


The central theme of Donald Trump’s economic policy is trade.  He promises to slash America’s trade deficit by tearing up international agreements and imposing massive new tariffs on imports from China (45%) and Mexico (35%).  By cutting the trade deficit from $500 billion to zero, according to his senior economic advisers, $1.74 trillion in new tax revenue will accrue to the Treasury over the next decade.  Trump will use this massive windfall to fund two-thirds of his proposed tax cuts.  If true, this will indeed go some way toward Making America Great Again.


But unfortunately it isn’t—not by a long shot.  If produced by a Macro 101 student, this sort of analysis would send his professor into paroxysms of red-pen rage.


Guest Contributor: What Does History Tell Us About Trump’s Trade Policy? - z pro


Trade deficits, you see, do not just disappear, and tax revenues soar, because you block imports.  A trade deficit results from a deficit of savings relative to investment.  If savings and investment don’t budge after imports fall—which they don’t in the Trump analysis—then exports must fall by an equivalent amount.  The mechanism by which this would happen is simple.  The lower demand for non-U.S. currency created by the import cut pushes up the value of  the dollar, which makes U.S. exports more expensive and imports cheaper.  So imports rise and exports fall.  The trade deficit remains the same.


For the trade deficit to fall, savings and/or investment have to change. The last two times we saw a significant fall in the trade deficit—in 1988-1992 and 2006-09—investment fell significantly more than savings.  What was the result?  The two largest recessions in the last 35 years.


In short, the idea that protectionism is the road to riches is logically and historically monstrous.  Trump needs a new big idea.


*  *  *  *  *


This Hedgeye Guest Contributor research note was written by Benn Steil and Emma Smith. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. This piece does not necessarily reflect the opinion of Hedgeye.

Poll of the Day: Which Option Is MOST LIKELY To Occur In The Next 4 Years?

Takeaway: What do you think? Cast your vote. Let us know.

Poll of the Day: Which Option Is MOST LIKELY To Occur In The Next 4 Years? - poll 10 13 16


CHART OF THE DAY | Presidential Election Polls: What We Can Learn From Brexit

CHART OF THE DAY | Presidential Election Polls: What We Can Learn From Brexit - cod chart


We can learn much about current presidential election uncertainty by thinking about pre-Brexit polling in Britain. 


A New York Times story today calls into question current presidential election polling. The key claim is that a USC/LA Times poll overweights small groups thereby positively distorting Donald Trump's favorability among voters. Hedgeye Director of Research Daryl Jones discusses what this means in today's Early Look (our morning newsletter to investors):


"Interestingly, if we remove that poll from the last 10 major polls, Clinton's lead jumps to +8. Perhaps then, the non-consensus view is not that the polls are wrong and Trump still has a shot, but rather the polls are wrong and Clinton is going to win and the Democrats are going to run the table? The market might like a Clinton Presidency better than a Trump Presidency, but it probably won’t like a clean sweep by the Democrats.


That all said, anyone remember the polls before Brexit?"


Point taken. As you can see in the chart above, just before the British referendum about whether to stay or leave the European Union odds were heavily staked in favor of the stay camp. We all know how that turned out. Whether or not Clinton is actually leading in the polls doesn't necessarily matter. 

A lot can happen in the next 25 days. 

Cartoon of the Day: Economic "Growth"

Cartoon of the Day: Economic "Growth" - sine curve cartoon 10.12.2016


U.S. economic growth continues down the slope, from 3% to 2% to 1% to...

What The Media Missed: ‘It’s Literally A Lie’ To Say U.S. Growth Isn’t Slowing

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough explains what mainstream media networks missed about U.S. economic growth and the broader implications for investors.

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