Why we need to look beyond OPEC when anticipating oil prices

The most important factor in determining oil prices is what happens here in North America

Alberta Venture, June 2016

“A freeze would make no impact whatsoever,” says Tim Pickering of Auspice Capital. “The most important factor is what happens here in North America.”  Photograph Paul Swanson

“A freeze would make no impact whatsoever,” says Tim Pickering of Auspice Capital. “The most important factor is what happens here in North America.”
Photograph Paul Swanson



If you’re friends or family with any of the thousands of Albertans who’ve lost their jobs in the oil patch, maybe you’ve witnessed this: OPEC announces a meeting to discuss an output freeze and the price of oil inches upward. Then, stories about the output freeze are shared on social media like maps to buried treasure.

After all, if OPEC restricts its supply, there’s less product on the market, causing the price to rise. It’s understandable that Albertans would get excited every time an output freeze is on the table and curse OPEC every time it fails to lock one down. Many of us will be looking to the meeting on June 2 in Vienna with the hope that it’ll float oil prices higher. There’s just one problem: Output freezes don’t matter.

What good would it do for Saudi Arabia and Russia to freeze output? The two biggest crude producers in the world were proposing to freeze at record levels; combined, they produce more than 20 million barrels a day. That’s about as useful as capping GHG emissions at record-high levels and hoping to meet climate-change goals. An output freeze like that, were it even to be put in place, wouldn’t affect the underlying market conditions that warrant the freeze in the first place.

Even the International Energy Agency said in April that “any deal struck will not materially impact the global supply-demand balance.” The market has already factored in this pessimism: when OPEC announced it would be meeting in June, the market didn’t react like it did in February, when news of a meeting caused crude prices to jump four per cent.

The freezes, instead, merely reflect the changing power dynamic between oil-­producing countries: OPEC is using the meetings to exert its influence on the global oil market in the face of increased production from the U.S and the influx of Iranian oil. In Saudi Arabia, there’s pressure to reduce oil dependency and establish a sovereign wealth fund.

So why do we invest so much hope in the meetings? Tim Pickering, the founder, president and CIO of Auspice Capital, says the average person inflates the cartel’s importance – and miscalculates Canada’s – on the world’s biggest oil consumer. “They believe that OPEC’s in control, that Saudi Arabia is the largest supply of foreign oil to the U.S.,” he says. The reality is that the Persian Gulf supplies just 16 per cent of U.S. oil imports. Yet a recent poll found that Americans think 60 per cent comes from Saudi Arabia and that 15 per cent comes from Iraq.

But we need something to believe in – what now? “A freeze would make no impact whatsoever – the most important factor is what happens here in North America,” Pickering says. “If we continue to get rig counts dropping and we continue to take production off, that has the potential to help correct the oversupplied market.” But, understandably, no Albertan sharing stories about output freezes wants to hear that. Still, the market’s recent indifference to the OPEC talks is a sign that the market is stabilizing on its own. Now that’s worth sharing.

Reprinted with permission from Alberta Venture.