Mei Xinyu: OPEC cut production and insured fruit can do it?

Mei Xinyu, Researcher, Institute of International Trade and Economic Cooperation, Ministry of Commerce

The Export Reduction Agreement reached by the Organization of Petroleum Exporting Countries (OPEC) on November 30 strongly boosted international market oil prices on the same day. US West Texas Crude Oil Futures (WTI) and London Brent crude oil futures all rose more than 9%. The price of oil broke through the $50 mark per barrel. However, can OPEC's production and insured strategy be truly implemented? I am afraid the answer is no.

Let us first look at the supply side of the crude oil market and the entire energy market. It can be seen that the reduction of production by OPEC members of 1.2 million barrels per day may not be realized, and OPEC’s commitment to cut production will definitely be seen by non-OPEC members. To make full use of the opportunity to increase production; Trump's post-employment policy program also announced that it will further enhance the market competitiveness of US shale oil and gas; in addition, China has relaxed excessively rigid coal companies to reduce production control, Trump's coal mining in the United States and The loosening of consumption will also stimulate the substitution of coal for oil in the energy market.

The Organization of Petroleum Exporting Countries is undoubtedly the most influential international cartel in the market today. Since its inception, OPEC’s manipulation of oil production quotas has had a major impact on oil prices, and to a considerable extent artificially maintained high oil prices. Relevant statistics show that after the 1990s, the average ultra-high pricing rate of domestic cartels (that is, the price paid by users for cartels is higher than the price without cartel) is 22%, and the average super-high pricing rate of international cartels 25%. (See Liu Yan, Yu Zuo, "Research on the Effective Deterrent Mechanism of International Cartels.") The artificial increase in oil prices caused by the OPEC mechanism will only be higher than this.

However, the binding force of cartel's unified actions tends to weaken as the number of members increases. The recent wars have significantly increased the number of owners of oil-producing areas, thereby weakening the binding force of the Organization of Petroleum Exporting Countries to maintain the production quota mechanism for oil prices, and greatly enhanced the intrinsic motivation of new owners in the oil-producing areas. Although the Syrian battlefield and the Libyan chaos are much more calm than in previous years, the Iraqi Kurdish region has been operating in the oil market almost as much as the independent producers. In other words, at least one de facto “oil exporting country” has been added.

At the same time, the more "successful" a cartel is, the higher the ultra-high pricing rate caused by its manipulation behavior, and the stronger the intrinsic motivation of its members to seize the market share in violation of the agreement. In dealing with this "moral hazard" of member states, OPEC does not have any tangible enforcement mechanism to punish countries that violate the production-inflation agreement, and even the non-OPEC countries.

The production reduction agreement stipulates that starting from January next year, OPEC members will cut production by 1.2 million barrels per day from the current level, equivalent to about 1% of global production. Non-OPEC oil producers, including Russia, are expected to cut 600,000 barrels per day. However, this year, Iran, which has lifted the blockade, is in a hurry. It is urgent to expand oil production and exports in order to increase income and improve the domestic economy. Will they really fulfill their commitment to cut production? Moreover, the fierce opposition of the newly elected President of the United States, Trump and his team members, to the Iranian nuclear agreement may exacerbate Iran’s sense of crisis and will stimulate the government’s rapid expansion of production, and will rush to export more before Trump’s Iran nuclear agreement. Accumulate income.

It is not convincing to review the history of OPEC members' compliance with the commitments of the production reduction agreement. According to historical data provided by Zero Hedge, a well-known financial blog site in the United States, during the 1982-2009 period, the actual reduction in output of all 17 OPEC production cuts was usually about 60% of the agreement. In this way, if the production reduction agreement is also based on historical laws, the actual production reduction will be about 700,000 barrels. In Nigeria and Libya, which have been approved to cut production in this agreement, the daily export volume of crude oil has increased to 500,000 barrels since October this year, and both governments have publicly announced that they will continue to increase production, and their supply is expected to increase next year. It is enough to fill the actual production reduction of the OPEC agreement (about 700,000 barrels).

As for non-OPEC members, the expectations of OPEC members should not be too high. Yes, the market expects non-OPEC oil producers such as Russia to cut 600,000 barrels per day, of which Russia will reduce production by 300,000 barrels per day. But since 1998, Russia has participated in four production reductions, only 1998. The two participations actually reduced the output, and the two promised reductions in 1999 and 2002 turned into a substantial increase in production. Moreover, this time Russia also proposed that maintaining its current production is equivalent to a reduction of 300,000 barrels per day, on the grounds that its original planned 2017 output has increased so much more than current production.

Brazil, Canada and Kazakhstan have a stronger incentive to take advantage of this OPEC production cuts to expand production and exports, particularly in Brazil and Kazakhstan. After all, Brazil and Kazakhstan are experiencing severe economic difficulties. After the oil price avalanche in the second half of 2014, they finally ushered in a relatively decent rebound (although the current oil price is still only 1 in the peak of the bull market in the beginning of this century). /3) They can't possibly find ways to produce and export at full capacity.

As for the US shale oil industry, it has shown amazing resilience in the oil price avalanche in the past two years. Instead of being completely squeezed out of the market as Saudi Arabia expected, it has succeeded in drastically cutting costs and improving it. effectiveness. Although some shale oil companies have temporarily suspended production, they are also able to resume production at any time, which has been reflected in every market rebound in the past two years. This is no exception during the OPEC production and insured agreement. The technological advancement based on human ingenuity and the profit-seekers who rely on resource endowments compete with each other, and history will once again prove that the ultimate victory belongs to the former. What's more, Trump announced that it will greatly relax and cancel a series of restrictions on domestic oil and gas development. The cost of US oil and gas production is expected to be further reduced, and the competitiveness of the international market is expected to further enhance.

In view of the above factors, the total global oil production next year is likely to be higher than 2016. Considering that the new Panama Canal has been navigable, the United States, Venezuela, and Brazil's subsoil oil and gas have been able to enter the most demanding East Asian market with competitive transportation costs. The first ship of LNG exported by the United States through the new Panama Canal is exported to Guangdong. In the energy import market in East Asia, the influx of a new number of competitors will inevitably lead to an index-oriented downward guidance.

Not only that, but in terms of the entire world energy market, the Obama administration's demanding clean energy bill and the Chinese government's two years of severe coal production restrictions have reduced coal consumption demand and stimulated the substitution of oil and natural gas for coal. However, as Trump takes office and fulfills his promise to relax and eliminate coal production and consumption control, as the Chinese government relaxes and cancels the excessively strict coal production policy, the effect of the above-mentioned alternative trend will appear to a certain extent. reverse.

If a cartel organization wants to achieve the “success” banned by the order, it needs a mobile producer with sufficient capacity and output and willing to bear the loss of production. Saudi Arabia has played this role for a long time, but in the oil price avalanche in the past two years, due to changes in domestic and regional economic, political and military situations, it feels unsustainable and has adopted a strategy of maintaining market share without insuring prices. The price of the price and the competitors launched a comprehensive "fighting and melee". This time, Saudi Arabia is willing to commit to cut production in order to reach a production reduction agreement, mainly considering that its state-owned oil company, Saudi Aramco, is preparing for listing, and is preparing to unveil one of the country’s top economic secrets, Saudi Aramco, as never before. Oil and gas reserves. The cut in production and insured prices will help sell the company's initial public offerings at a good price. But if it feels that its own production restriction measures are only cheaper competitors to occupy market share, then Saudi Arabia may turn to the policy of maintaining market share without insuring prices at any time. After all, Saudi Arabia's idle capacity accounts for 80% of the world's total, and it is easy to put idle capacity into production at any time. The domestic and regional economic, political and military changes that led to Saudi Arabia's “guarantee market share” are still in existence for the past two years.

From the demand side, oil exporting countries should not be overly optimistic. After all, the current world economic growth is not optimistic, and the Italian referendum and other factors have brought new major uncertainties to Europe. Even in China, the current largest crude oil importer, the actual growth of refined oil consumption is likely to be minimal, or even no growth at all. Although the book value of China's crude oil import growth is strong, a considerable part of it is actually used to make up for the gap in domestic production reduction, and part is used to convert refined oil products into high-efficiency domestic refineries. In 2015, China's refined oil exports surged 52% year-on-year to 36.15 million tons; in the first nine months of this year, refined oil exports increased by 21.2% year-on-year to 34.05 million tons. A considerable part of the use of low-cost periods to fill domestic reserves. During the period when OPEC cut production and insured prices and the international market oil price rebounded, China could completely suspend the filling of strategic reserves and wait for the favorable opportunity after the expiration of the production agreement or even the abortion.

At the same time, we must consider the impact of changes in US monetary policy. In the article "The US General Election, Central Bank Independence and Commodity Quotes" published on the eve of the US election on November 9th, I proposed that the Fed’s delay in raising interest rates will not help the world economy. The asset bubble, including the strong rebound in the primary product market since the first quarter of 2016. At present, the end of the US election and the Fed’s interest rate hike may trigger a market reversal, ending the “Xiaoyangchun”, a primary product market that lasts for more than half a year. Moreover, Trump’s expectation of monetary policy is to promote the development of the real economy sector and curb the asset bubble in the virtual economy sector, so it is more inclined to resume normal monetary policy. Now, Yellen and other Fed decision-makers have made a fairly "hawkish" attitude toward raising interest rates. The newly released data also shows that the US economic situation is improving. The annual GDP growth rate in the third quarter was 3.2%, the strongest growth rate in the third quarter since 2014; the unemployment rate in November fell to the lowest since August 2007; the Fed's Beige Book shows that most regional economic prospects are optimistic. The Fed’s interest rate hike has already been on the line, and once it is implemented, it will definitely crack down on speculation in the commodity market.

At the same time, the Fed's rate hike will also exacerbate the return of capital from emerging markets to the United States, thereby exacerbating the economic turmoil in emerging markets, which will constitute new restraints for the energy demand of the fastest growing emerging markets.