OPEC Games The Speculators

Speculators act on OPEC’s every word, but what happens when OPEC manipulates the speculators?

Tuesday’s oil market has proven, once again, that OPEC can play the speculators ‘ game too.

Last week, the price of oil was slowly climbing back up to $50 a barrel, apparently based on reports that OPEC leaders were planning to meet to discuss a production freeze at the end of September. At the start of this week, however, the media reported that most analysts do not believe that OPEC will agree to a production freeze (an obvious conclusion), that the number of new oil rigs in the U.S. is increasing, and that Iraq is planning to increase oil exports. The price of oil began to decline.

Speculators

Then, suddenly, around midday on Tuesday, the price of oil shot up by almost $1.50. The culprit? A Reuter’s report based on an unnamed OPEC source, that Iran might be interested in “joint action,” to support oil prices. Despite the fact that the Iranian Oil Ministry has not even confirmed that Iran will attend the September meeting in Algeria, speculators saw the headline and ran with it.

Iran

Iran has no incentive to curtail its oil production. The country needs money desperately and has just overcome a major political hurdle on the way to offering new types of petroleum development contracts (called Iran Petroleum Contracts or IPCs) to investors. Agreeing to freeze its oil production at current levels would send a message to investors that Iran is not open for petroleum development and would severely limit the country’s ability to increase its revenue in the future. Iran cannot do that.

Speculators ‘ Game

What Iran and other OPEC countries can do, however, is play the speculation game. Given that all oil producing countries and companies (with exceptions for destitute countries like Venezuela) are producing at high rates, and given than global demand is not increasing at the same rates, the price of oil is stuck below a certain threshold and above another.

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