John F Kennedy was paraphrasing a Chinese proverb when he said “There is a great deal of noise on the stairs but nobody comes into the room.” His point was that it is easy to talk about problems but rather more difficult to fix them. This applies to many parts of the financial markets following years of travails, with growth and inflation lacking and central banks not far from their wits end. However, it’s perhaps even more applicable to recent action (or lack thereof) by oil cartel OPEC (Organisation of the Petroleum Exporting Countries).

What was once an efficient group of price setters for much of the world’s oil production now remains stuck between a rock and a hard place. It is struggling badly to adjust to a global supply glut that is the result of a highly successful US foray into shale/fracking that has allowed the nation to become more energy sufficient. And one that has contributed to a halving of the oil price, decimating the public finances of many an oil reliant state, creating factions and very public disagreement about freezing global production. With prices so low, nobody can afford to cut.

OPEC thus doesn’t really know whether it is (as a group or indeed individually) looking left or right, or simply navel gazing. Comments are bullish on production cuts one day only to be countered by bearish stubbornness about giving up market share the next. Three weeks ago Saudi Arabia tried talking up the prospect of ‘unofficial’ OPEC and non-OPEC (read Russia) production freeze talks in Algeria next month. This worked for a bit (prices gushed 15% higher) but comments about boosting Riyadh’s record output levels even further have since seen oil prices peak last Friday.

Even comments from thorn-in-the-side Iran about attending these talks (Tehran refused the last round in April) and supporting action to freeze supply have failed to help the price resume its ascent. Probably because this was just as quickly negated with “others must still respect Iran’s right to keep raising production” as it recovers from sanctions and works to regain market share. Ha! The Saudi oil minister remains hopeful of a production freeze agreement (of course he does) but has already started taking down market expectations, stating that “no specific output levels have been discussed” and that “market forces should be strong enough to avoid the need for significant intervention”. Fantastic!

So once again markets find themselves none the wiser about an OPEC-led production freeze (much  like the outlook for US monetary policy, to be honest). April’s meeting came to nothing after being billed as the potential deal of the century, because Saudi Arabia refused to attend unless Iran sat in too. To be fair though, the build-up to that meeting was at least successful in bringing oil prices well up off their 12yr lows of sub-$30 to revisit the key $50 mark and create a new $40-50 range. This was progress of sorts. However, the recently engineered chat-inspired bounce from $40 has already failed to match June’s $52 highs.

This may be a concern to Bulls hoping oil might yet breakout to revisit 2015 highs of $60 in the second half of the year. However, traders are increasingly seeing through what is essentially a lot of noise from OPEC. The old ‘buy the rumour, sell the fact’ may be running out of steam. Which could be bad news for the price of a barrel, the drillers/explorers getting the stuff out of the ground (e.g. Tullow, Premier Oil, Petrofac) and the majors (e.g. BP, Shell) that refine it. Then again central bankers have taught us that words are often much louder than actions. Expect plenty more ‘crude’ commentary from OPEC.

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Mike van Dulken, Head of Research, 26 Aug