It’s official: Opec is a source of price stability in oil markets

Pexels/Gustavo Fring

It is difficult to overstate the bogey-man status that American policymakers ascribe to the Organisation of Petroleum Exporting Countries.

US presidents routinely label Opec a “price-fixing cartel” in global crude markets, while Congress members threaten dire consequences if the oil producers cut output, or do not cut output, or leave output where it is.

Chuck Grassley, a Republican senator from Iowa, sponsored a bill to bring anti-trust legislation against the countries last year, saying: “We’ve seen time and again how Opec has colluded to set global oil prices, bringing uncertainty and high prices to consumers around the globe.”

Well, the senator will have to think again because it has emerged from an authoritative US study that, actually, Opec “reduces oil price volatility and prompts market participants to rebalance their positions”.

That verdict, distinctly at odds with the view from the partisan Washington “swamp”, is the conclusion of a long and densely analytical research paper published by the US Federal Reserve, titled Reasons Behind Words: Opec Narratives and the Oil Market.

Over more than 50 pages, the authors – a policy wonk from the Federal Reserve Board and two French academics – break down the effect of Opec decisions, communications and “signalling” on global oil markets.

They find that, far from “bringing uncertainty and high prices”, Opec has been a force for price stability and moderation.

My favourite bit of gobbledygook

The paper is part of the Federal Reserve Board’s Finance and Economics Discussion Series and it is not an easy read, with much discussion of academic methodology and modelling. “Estimated coefficients of the penalized bootstrap Lasso regressions for trading positions” was my favourite bit of gobbledygook.  

Nor can you envy the authors their task. They analysed every Opec press release and public statement between 2002 and 2021, and plotted those against actual movements in the crude oil price (using West Texas Intermediate as their benchmark) and trading volumes on the Chicago Mercantile Exchange, the big US oil trading market.

That period takes in three important periods of oil price volatility: the global financial crisis that began in 2008, the surge in US shale oil output between 2015 and 2017 and the start of the Covid pandemic in early 2020.

On all three occasions, they conclude, Opec communications were effective in calming global markets and ironing out price spikes that threatened disaster for global energy markets and economies.

Outside the authors’ remit – though perhaps more illustrative of Opec’s ability to deliver decisive action to reassure markets – were the wider measures taken in the wake of the oil price collapse in April 2020.

Then, as US oil producers were briefly paying consumers to take the barrels away, Opec and other market players got together to produce the biggest oil cut in history, a historic event that led to a gradual steadying of the ship.

This has continued to the present day. Given the stressful geopolitical situation, with open military confrontations in the Middle East, Europe and Africa that have the potential to escalate into much bigger conflicts, it is remarkable how comparatively stable the price of crude has been, anchored largely in the $75 to $80 per barrel range.

Opec communications calmed global markets and ironed out price spikes that threatened disaster

This stability is mainly due to the ongoing Opec policy of output restraint, led by Saudi Arabia, even as other producers such as the US, Iran and Venezuela significantly increase production.

It is important to point out that the report confined its parameters to Opec, rather than the broader Opec+, which includes Russia, itself a source of energy volatility since the invasion of Ukraine.

The report asks whether Opec pronouncements are “cheap talk or credible signal”. It concludes: “Opec narratives cover a wide range of topics that are indeed linked to the fundamental factors we consider.” For those in the US who think Opec is a political tool of the Middle East, the authors decide that “Opec narratives are based on crude market fundamentals”.

Both Joe Biden and Donald Trump – obsessed by the electoral impact of gas prices – have made great political capital out of Opec in the past, and will probably do so again if they line up against each other once more in November.

They should each get an aide to summarise the Fed report before they start the mud-slinging.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE