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Here's How OPEC Manipulates The Oil Market

Published 08/24/2016, 05:53 AM
Updated 07/09/2023, 06:31 AM
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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.

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