The writing is on the wall for Opec: It needs to cut more

Crude's cascade into bear market territory could be down to algorithmic and technical selling

Brent and WTI are in bear territory, having crashed 22% from the year's highs. You can call crude over-sold, you can put it down to technical and algorithmic trading. But you can't ignore the fact that it is more than just fickle, volatile sentiment this time: the OPEC/non-OPEC cuts may be removing up to 1.7 million b/d from the market, but the growth in US, Libyan and Nigerian output is putting more than 1.5 million b/d back, leaving net reduction at less than 200,000 b/d. 

Of course, the producer group could continue advising patience to the world for the elusive evidence of a decline in global oil inventories, as it has being doing for the past few months. But this week proved that no one is listening any more.

Crude’s clumpy cascade this week into bear market territory could be put down to algorithmic and technical selling, but for the purposes of this discussion, the mechanism behind the latest downward spiral is moot. OPEC needs to respond not to the crude traders’ seeming paranoia, but to the fact that its current quantum of cutbacks have been all but neutralised.

OPEC and its non-OPEC collaborators are in a corner, but if the Saudi and Russian energy ministers stand behind their “whatever-it-takes” pledge of last month to rebalance the markets, the time has come to deepen the cuts. It won't be easy, but it is not impossible and a far more suitable option for OPEC than admitting defeat.

As a matter of principle, OPEC maintains a healthy disdain for short bursts of price volatility, no matter how large, as far as adjusting its supply policies is concerned. While that is understandable especially in the current situation for a group pursuing an inherently slow process of restoring equilibrium to a market that has been out of balance for three years, it is now time to heed the price signals. 

OPEC has been written off several times in recent months, and the same body of sceptics now thinks it will fail to rise to the latest challenge. We maintain our view that the bloc has determination and commitment behind its new market-balancing role under the Saudi leadership, and is unlikely to give up. And that means it has to respond.

The author is an independent oil market analyst.