OPEC meeting went as expected. There was no formal agreement to cut production in the first meeting since the price correction. This part is very similar to 1998. Prices did their thing by falling down and now slowly rebounding. OPEC is making the decision they are not the marginal barrel. Unlike their decision in 1997, they are likely right. Time is the key to how this all unfolds. The daily and weekly gyrations of crude oil prices are made by traders who believe they are able to read the dynamic tea leaves. The story of the oil markets can be explained by examining the details in the demand and supply fundamentals from the past and now.
Supply
From 1993 to 1998, Non-OPEC production grew almost by 10% with OPEC growth in production nearly 20%. In addition, the Non-OPEC production outside US and Europe represented the majority of the Non-OPEC production increases. This is much different than 2009 to 2014 figures. Both OPEC and Non-OPEC production grew close to 8%. The majority of the Non-OPEC production growth came from the US. The dynamics of the increasing production will lead to a different result compared to 1998.
In 1998, most of the battle of production/market share was battle within the organization. The Non-OPEC production was coming from a diverse group with Europe production gains representing the largest group. Non-OPEC gains were coming from some significant finds which took a large capital cost to develop and was going to take many years to fully hit the production peaks. OPEC tried to hold the line, but they were only going to capitulate themselves. The Saudi’s showed the world a glimpse of producing oil near the kingdom marginal economics. This was too painful for many of the members and they succumbed to over producing their quotas which realigned the market over many years given the growing Non-OPEC production.
In 2014 most of the production gains is resulting in OPEC market share eroding in the largest oil demand market. This is no longer a battle within the organization. The marginal economics for this increasing production is much higher than in 1998. In addition, the profile of this production requires continual investments versus large capital outlays to maintain and increase production. This very fact will create a dynamic response to price which was missing in 1998. This is not a cure for a rebound in price over the next few weeks to months, but it will be a response which could not have occurred in 1998 without OPEC coordination.
