Ministers from OPEC and non-OPEC oil exporters are meeting in Vienna today and tomorrow to decide whether to extend production cuts that have been in effect since the start of the year.
The formal conference comes after extensive consultations in recent weeks which seem to have produced a consensus to extend cuts at the same level for a further nine months to the end of March 2018.
But with oil traders focused on Vienna, it is worth asking whether the cuts agreed by OPEC on Nov. 30 and non-OPEC on Dec. 10 have had any significant impact on prices so far.
The front-month Brent futures contract is currently trading around $7.50 per barrel higher than before the OPEC cuts were announced.
But front-month prices had already risen by more than $18 per barrel over the 10 months prior to the last OPEC meeting.
There is no prima facie evidence that OPEC and non-OPEC production cuts changed the previous trend in prices (tmsnrt.rs/2qP9ZwJ).
A proper evaluation of the output cuts requires a comparison with what would have happened to oil prices without them.
As with any counterfactual, it is impossible to know with certainty what would have happened to prices in their absence.
Cut supporters argue that the OPEC and non-OPEC deals averted a renewed collapse in oil prices by halting the rise in inventories.
They can point to a remarkable turnaround in market sentiment and hedge fund positioning from very bearish prior to the OPEC meeting to very bullish afterwards which helped push prices sharply higher.
For doubters, the production cuts and rising prices threw a lifeline to U.S. shale producers and encouraged them to ramp up drilling even faster, jeopardising the long-term market balance.
And by boosting their own production so much while the accords were still being negotiated, OPEC and non-OPEC countries actually made their task harder and pushed back the rebalancing process.
From the available evidence, it is difficult to conclude with any certainty whether or not the OPEC and non-OPEC agreements had a significant impact on prices.
Front-month Brent futures prices closed on Tuesday at $54.15 compared with $48.35 on May 23, 2016, an increase of just $5.80 over the last 12 months.
There is some evidence the last meeting had a short-term impact on prices in the days and weeks leading up to it and immediately afterwards.
But there is less evidence that it had a persistent impact on oil prices that would not have occurred otherwise if market forces had been left to play out on their own.
The rise in oil prices over the last year might be attributable to a normal cyclical recovery as much as OPEC action (tmsnrt.rs/2qjUB8b).
Oil prices are influenced at least as much by developments in the remote oil fields of west Texas and at the petrol pumps of India as they are by high-profile meetings in the hotels and conference rooms of Vienna.
OPEC meetings command a lot of attention from traders, analysts and journalists because they provide a high-profile piece of market theatre complete with its own rituals.
OPEC meetings give physical form to an oil market that is otherwise just a complicated and rather abstract concept.
But the lack of an unambiguous price impact from the current output cuts should serve as a warning about over-emphasising OPEC at the expense of structural factors in the oil market.
Frontpage December 2, 2019