Opec meeting puts hedging in focus

Members of the Organisation of Petroleum Exporting Countries (Opec) meeting in Vienna today have agreed plans to rein in a global supply glut.

The meeting assessed the impact of the group’s production cut agreement over the past six months and negotiated a potential extension of the deal with non-Opec (NOPEC) participants for a further nine month period to March 2018.

The current agreement has aimed to cut production by 1.8m barrels per day (mbd) in a bid to stabilise or even raise the global price of oil, which is still down sharply from its mid-2014 peak.

The outcome is likely to have implications for finance officers working for commodity-driven corporates. “This Opec meeting has a funny sense of déjà vu, and past agreements on cuts to production have been problematic to say the least,” commented Mark O’Toole, vice president of commodities and treasury solutions at software provider OpenLink.

“Remember Iraq, Russia and Iran all previously balking. Other Opec members, such as Nigeria and Libya, have since had exemptions and been expanding their output – which has put additional strain on the other members.

“Oil has been slowly creeping up, from US$48 a few weeks ago to over US$50 today. These latest cuts will only fuel further rises and as a result, any corporate buying up or using large quantities of oil will feel the hit. Don’t be surprised, as prices shoot up, to see the major airlines and chemical manufacturers deploying dynamic hedging programmes to help alleviate any short and medium term spikes.

“The problem is that most oil producing countries are facing steep budget deficits of their own, largely in part due to the drop in oil prices over the last two years. This will make balancing the oil supply much harder as it will take time to do this and get investment flowing back into the new production. Therefore, the cuts will have to be much deeper which begs the question, can they really be sustained in the medium-to-longer term?”

Opec’s efforts to revive prices are undermined by the thriving shale industry in North America, which has seen the US develop into a major producer and steadily reduce its reliance on oil imports while loosening the hold on global supplies of Opec members and Russia.

The fall in prices three years ago was caused by a Saudi Arabia-led bid to flood the market and squeeze out US competition, but this underestimated the length and severity of the ensuing downturn. Saudi Arabia renewed efforts to manage the market last year, seeking the backing of Russia and other producers from outside the cartel.

Analysts have suggested that while Kazakhstan appears to be the only major oil exporter that has not voiced a wish to extend the agreement, it is possible that several countries could break rank before the extension runs out next March.

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