Chris Faulkner on Oil Price Volatility

Faulkner: Why Friday’s OPEC Meeting Will Be Insignificant, Like OPEC Itself

Here is the proposed agenda for Friday’s OPEC meeting in Vienna:

10:00 – Convene
Noon – Adjourn
16:00 – Hold a press conference

That’s it. Oh, and probably plenty of forged smiles and photo ops before, during and after. However, if we could somehow peel the curtain back and see the real picture, things are not at all as rosy as it may seem.

I’d give anything to be a waiter at that 4-hour lunch.

For one, the disarray inside the Saudi Kingdom since King Abdullah’s death last January has been widely publicized, at least the part that is publicly known. Cabinet shifts and swooning around the aging and sometimes mentally foggy King Salman has created internal chaos up and down Erga’s gold and marble lined corridors.

There’s also the rift between the OPEC haves and the have-not’s. More specifically, Venezuela, Ecuador, Algeria, Angola, Nigeria in one corner versus Saudi Arabia, UAE, Qatar, and Kuwait in the other. Iran, Iraq and Libya could care less. Indonesia is the new kid and just glad to be back in the room.

The lesser OPEC member nations are on the ropes financially. The cash-fat nations are draining reserves at unexpected levels, but can last years before reaching truly critical levels. When they pull into Vienna this time, they could probably care less it’s on a virtual credit card, of sorts.

Speaking of Iran, the latest defiance appears to be an effort to open up 50 new projects to foreign ventures, with projections of up to one million barrels per day added to the already saturated global crude market. It will be interesting to see how many American based companies line up to pounce on those hot prospects.

As for Russia, they’re on the sidelines this week, at least as far as this discussion goes. There will be an official meeting between Soviet and OPEC higher ups, but it won’t be until mid-December, so they continue pumping and competing, primarily for European and Asian market share.

Many are not expecting any changes to production Friday, but I think they will actually raise their daily quota to 31 million barrels, taking Indonesia’s production into account. However, as we have seen for the last year, it’s basically quota-schmota anyway. The number Saudi pushed so hard in 2011 to establish has been as elastic as a rubber band. Although stated at 30.3 million barrels per day, current OPEC production approaches 32 million barrels, and once Iranian sanctions are lifted, that number goes up more.

Just think what oil prices would do if they actually held to the quota, which is exactly the point. There is no cartel. No agreement. No enforcement, management or group compliance.

Which brings us back to this week’s “meeting.” OPEC is losing their significance faster than their cash. Saudi has lost control once again. Iraq is unmanageable and will pump as much as it can. Iran has made its intentions very clear for next year. Libya is unpredictable and their volume basically doesn’t really count. Indonesia is another bit player and their production is already factored into world supply, so there’s another non-event.

It doesn’t appear Venezuela, Ecuador and the other smaller countries will ever exert enough pressure to sway the Shia Crescent to hear their futile pleas. That leaves us about where we have been for a year now. A “cartel” of (soon to be thirteen) nations that gets together twice a year to smile, take pictures, enjoy a decadent lunch and then go back home to do whatever they want.

OPEC has basically become a social club (or perhaps not-so-social club lately).

Until global demand increases or one of the lesser nations tips into insolvency, the only other catalyst on the horizon to positively affect oil prices might be more unrest in the region, which as we saw over the last two weeks could be one headline away.

Meanwhile, oil is likely to re-test the August lows. Where it goes from there is truly anyone’s guess.

Written by: Chris Faulkner, Breitling Energy CEO, Chairman and author of “The Fracking Truth: America’s Energy Revolution”