Publications: Notes at the Margin

The Curse of Expectations (April 3, 2017)


Attention is turning again to OPEC and the non-OPEC producers who agreed in December to cut production for the next six months. Many believe the agreement is working. Prices have increased from the low levels observed at the beginning of August. Some also think, per Argus Media, that destocking is occurring but that the output reduction must be continued for another six months for the stock draw to have any chance of bringing prices up to OPEC's goal of around $60 per barrel.


Success, though, is not guaranteed. Oil consumers are no longer obedient children who listen and do as they are told by oil producers. Markets have been transformed from orderly institutions managed first by a cartel of integrated companies and then a cartel of exporting nations into a disorderly group of educated consumers, smart and well-capitalized traders, strong-minded independent producers armed with the latest technology, financial institutions offering buyers and sellers methods to trade or hedge, and some old companies that, while smaller, still produce and refine oil. The oil market today comes as close to a competitive free market as possible in a large capital-intensive industry. Against this background, OPEC has a huge task ahead. In this report, we provide the details.


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