At LPL Research, we have been thinking about the upcoming interim OPEC (Organization of the Petroleum Exporting Countries) meeting, regarding the long discussed idea of a freeze on output, and the fact that issues within OPEC are typically determined by politics and long-term strategic considerations.
The other thing that has been top of mind for many of us is opening week of the 2016 baseball season. To help make sense of the situation regarding OPEC, we return to the old baseball adage, “You can’t tell the players without a scorecard.” Here is a quick summary of the players at this weekend’s OPEC meeting.
Saudi Arabia: Starting Pitcher. As the country with the greatest production and reserves, Saudi Arabia is by far the most important member of OPEC. Its interests are in continuing to be the main source of oil for Asia, and in limiting the influence of their main rival in the region, Iran. Key to the game: Remain number one.
Iran: First Base. Iran is strategically important. Its location allows it to control key shipping lanes if it so chooses. It also has the fourth-largest oil reserves. But it has been hobbled by injury—the reduction in output due to sanctions. Regardless of the outcome of the meeting, it wants to be able to increase production to regain economic stability and regional influence. Key to the game: Get healthy and be the player it once was.
Russia: Relief Pitcher. Russia is not a member of OPEC. But as a major oil producer that is highly economically dependent on oil prices, it plays an important role on the team at least for now. Russia has been increasing production despite low prices, presumably to make up for lost revenue. Key to the game: Influence the process despite being a part-time player.
Venezuela, Nigeria, Ecuador: Outfield. Individually, these countries are not that important to the process and have been hurt badly by lower prices—especially Venezuela, which is likely to default on some debt issues. They desperately want not just a freeze, but a production cut, in order to stabilize their economies, but they are too far away to influence the outcome. Keys to the game: Encourage their teammates, but mostly watch from the outside.
How will the game be decided? It’s going to be a close one. Iranian officials have scoffed publicly about a production freeze, calling it “stupid.” Technically, other OPEC members could allow Iran to refuse to participate, or “freeze” it at its previous, pre-sanction production rate. This would be a face-saving maneuver for all parties. But that requires the two main rivals to compromise with each other, which may be difficult given the animosity between them.
Game forecast: Cloudy and stormy, with a strong chance of a freeze.
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