Opec aims in vain for the Goldilocks oil price

london — CeraWeek has exposed all the contradictions at the heart of Opec’s attempt to rebalance the oil market without rekindling the shale boom or conceding too much market share to rivals. The oil industry conference in Houston started with a celebration of higher prices, progress towards drawing down global stockpiles, and optimism about the outlook for shale producers.

But it ends with the biggest daily fall in prices for more than a year, fears that stocks are not declining as planned, and warnings that shale producers could cause a renewed slump if they increase output too fast.

Opec members led by Saudi Arabia have reported nearly full compliance with output cuts announced last November, though performance remains very uneven across the group.

Once again, Saudi Arabia has made the deepest cuts to offset patchy compliance by other members, returning to its hated role of swing producer.

But Opec’s rush to increase output before the accord took effect in January has left the market bloated with crude that continues to show up in the statistics as tankers arrive in North America and unload. The attempt to beat the deadline has made rebalancing harder and effectively moved the market against the organisation’s own members.

Opec enlisted support from 11 other countries to spread the burden of rebalancing and protect its market share but compliance from non-Opec countries has been much lower. The organisation’s members have been forced to discount their selling prices to protect their prized relationships with Asian refiners.

And Opec has encouraged hedge funds and other money managers to believe prices will rise to $60 per barrel or more.

Hedge funds have accumulated a record bullish position in crude futures and options amounting to more than 900 million barrels in the expectation that prices will climb. Hedge funds nearly all expect the organisation’s output cuts to be extended beyond their current expiry on June 30 to draw down stockpiles. But Opec and Saudi Arabia have spent CeraWeek warning shale producers against raising output too much and assuming the production cuts will be extended automatically.

Saudi Arabia has pointedly warned shale producers that it will not cut its own output simply so they can grow theirs. Without an extension, however, global oil production would rise by more than 1 million barrels per day at the start of June, and oil prices would likely swoon.