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Here's How OPEC Manipulates The Oil Market

By Ellen R. Wald, Ph.D.CommoditiesAug 24, 2016 05:53AM ET
www.investing.com/analysis/how-opec-manipulates-the-oil-market-200149627
Here's How OPEC Manipulates The Oil Market
By Ellen R. Wald, Ph.D.   |  Aug 24, 2016 05:53AM ET
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Tuesday’s oil market has proven, once again, that OPEC can play the speculation game too.

Last week, the price of oil was slowly climbing back up to $50 a barrel, apparently based on reports that OPEC leaders were planning to meet to discuss a production freeze at the end of September. At the start of this week, however, the media reported that most analysts do not believe that OPEC will agree to a production freeze (an obvious conclusion), that the number of new oil rigs in the U.S. is increasing, and that Iraq is planning to increase oil exports. The price of oil began to decline.

Then, suddenly, around midday on Tuesday, the price of oil shot up by almost $1.50. The culprit? A Reuter’s report based on an unnamed OPEC source, that Iran might be interested in “joint action,” to support oil prices. Despite the fact that the Iranian Oil Ministry has not even confirmed that Iran will attend the September meeting in Algeria, speculators saw the headline and ran with it.

Iran has no incentive to curtail its oil production. The country needs money desperately and has just overcome a major political hurdle on the way to offering new types of petroleum development contracts (called Iran Petroleum Contracts or IPCs) to investors. Agreeing to freeze its oil production at current levels would send a message to investors that Iran is not open for petroleum development and would severely limit the country’s ability to increase its revenue in the future. Iran cannot do that.

What Iran and other OPEC countries can do, however, is play the speculation game. Given that all oil producing countries and companies (with exceptions for destitute countries like Venezuela) are producing at high rates, and given that global demand is not increasing at the same rates, the price of oil is stuck below a certain threshold and above another.

Within this price range, however, certain producing countries (such as Iran, Saudi Arabia, Iraq, Russia) have found that they can easily manipulate oil traders with words. While past oil ministers, such as the recently retired Ali al-Naimi from Saudi Arabia, often chastised speculators for their finicky reactions to his every word, the current generation is taking advantage. It seems that OPEC ministers are now manipulating the manipulators. They issue cryptic statements that are not lies but are not substantive either. These statements serve to raise prices while the countries continue overproducing. All they have to do to raise the price by a couple of percentage points is issue a statement or two about a possible meeting or a hope to “stabilize the market.” They wait a day, or an hour, and speculators take the bait, pushing up the price of oil.

This week has shown that the speculators have taken the bait yet again.

Here's How OPEC Manipulates The Oil Market
 

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Here's How OPEC Manipulates The Oil Market

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Do Deikins
DoRight Sep 19, 2016 3:19PM ET
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Maduro must have read your analysis since he just decided to enter the game.
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Aug 27, 2016 2:43AM ET
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I like your pen Speculations cen have a place in small range and finnaly gives nothing.Chart return on natural path..You will see so easy to compare times terrorists attack with market conduct on gold chart for example...Now we are in such place where only huge earthquake near Sues Chanel be able to elevate oli price.on old levels..Best reg
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Kuhailan كحيلان
Kuhailan2010 Aug 26, 2016 12:41PM ET
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Ellen & Yellen just Speculations & Manipulation :)
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Armen Mavisakalyan
Armen Mavisakalyan Aug 24, 2016 1:12PM ET
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The same word manipulation is the favorite activity of Federal Reserve. It manipulates markets in favor of some big market players.
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Not Important
Not Important Aug 24, 2016 1:07PM ET
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"Iran has no incentive to curtail its oil production. The country needs money desperately and has just overcome a major political hurdle on the way to offering new types of petroleum development contracts (called Iran Petroleum Contracts or IPCs) to investors. Agreeing to freeze its oil production at current levels would send a message to investors that Iran is not open for petroleum development and would severely limit the country’s ability to increase its revenue in the future. Iran cannot do that."..There is some big internal resistance to letting foreign capital invest in Iran to increase the oil production there. And a freeze would only mean that they would get 10$+ more for the oil they are currently producing so why should that NOT be lucrative? It is not so that if they let the foreign companies invest in Iran they will get the increase from one day to another. It will take at least a whole year+++ before there will be any increase to talk about...
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Nagaprasadm Murumuri
Nagaprasadm Murumuri Aug 24, 2016 1:06PM ET
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the point is, what the *****wil happen even if OPEC considered to freez.the world largest consumer now stopped to import to crude .the oil produced by all the companies can not compensate the out put .
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michele stalla
Blue Aug 24, 2016 9:50AM ET
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OK. Finally you too know that the markets all are manipulate!
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Sun John
Sun John Aug 24, 2016 9:14AM ET
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everyone has been so focused on the supply side of Oil and have completely neglected the Demand side of things. China the biggest oil consumer in the world is close to facing an enormous debt crisis, USD is going to be strong since the Fed will have to raise interest rate before they lose all of their credibility. Even with OPEC decided to freeze output at current level, it is still at a historical high level, without a consistent demand, the problem with oversupplying will continue to persist, there is only more downside for Crude.
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follow trade
follow trade Aug 24, 2016 8:08AM ET
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Hi Allen ..i do not know why you always cater for bearish outlook.As you already mentioned that Iran badly need money as they just overcame major political hurdle, so why cant cooperate with other producers which gives them better price for their production. i think even the idea of having Iran in that meeting makes speculation more firm.
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