For OPEC and other oil-producing nations, actions speak louder than words.
OPEC members have a horrible track record of sticking to their quotas when it comes to supply cuts. And, with OPEC's clout being challenged by emerging producers such as Russia and Norway, cheating becomes an even larger concern.
Thus while OPEC's rhetoric touting production cuts may give energy prices a short-term charge, lasting price support will come only from a resurgence in the global economy and energy demand.
OPEC has tentatively agreed to cut production 1.5 million barrels per day, but only if non-OPEC nations agree to cut production by an additional 500,000 barrels per day.
While OPEC Secretary General Ali Rodriguez may be convinced that will happen, Russia, at least, appears unwilling to play by OPEC's rules.
Russia initially agreed to only a 30,000 barrel per day production cut, snubbing OPEC's hope for a cut of between 150,000 and 200,000 barrels per day. And, if that message wasn't loud enough, after a second round of "begging" by OPEC, Russia agreed to increase its production cut to 50,000 barrels per day, not even a drop in the collective barrel considering OPEC's dictum.
It's clear Russia won't play by OPEC's rules, says one expert on Russian politics and economics. "This is Russia's attempt to make significant inroads into the international oil markets," says Marvin Zonis, professor of international business at the University of Chicago Graduate School of Business. "I think this is part of President Putin's commitment to the West to try to replace Saudi Arabia as the dependent swing producer of crude oil over time."
Russia is the second-largest exporter of oil, producing just under 10% of the world's oil, with the potential to make major gains with new exploration in the coming years. And, while lower oil prices could have a substantial impact in Russia -- where oil and gas exports provide $4 of every $10 in government revenue -- Russia appears ready to buy new international business. "The Russian economy does not turn around on the back of oil," Zonis said. "For Russia to demonstrate its commitment to the West they can take $15 oil."
OPEC needs additional commitments from Russia to make its production cuts work. Oil -- which traded higher Thursday on news that Norway, the No. 3 non-OPEC exporter, tentatively agreed to cut its production by 100,000 to 200,000 barrels per day -- gave back the gains on the news from Russia. It was later revealed Norway's cut -- and a proposed cut by Mexico, the No. 2 non-OPEC exporter behind Russia -- was contingent on cuts by Russia.
If OPEC is going to cut, it apparently will have to do so without the support of Russia,
a possibility we predicted before OPEC's latest move two weeks ago.
Without Russia, it isn't clear OPEC can support its rhetoric with action. While it may be in the cartel's best interest to remain united, history suggests that deep production cuts are rarely followed or enforced.
Current OPEC production data show compliance in September was running below 70%, the average compliance level for the cartel. That is before the proposed additional 1.5 million barrel-per-day cut.
While OPEC nations are sensitive to price, they also are sensitive to market share, which continues to slip. That may make the cartel members more reluctant to follow additional quota reductions, especially if nonmembers don't play along.
"Next to price, market share is the most important element that OPEC considers in its policy," said Tyler Dann, oil analyst at Banc of America Securities and a member of the TSC Energy Roundtable. "Because share today is lower than it was heading into the 1998-99 oil price downturn, OPEC has less capacity to cut production from current levels."
Members such as Iran have said they are reluctant to go along with new OPEC cuts, especially without nonmember cooperation. And, nations such as Libya, Kuwait and even Saudi Arabia have shown their willingness and ability to skirt production quotas through creative barrel counting.
With OPEC having trouble enforcing current quotas and with little hope for cooperation from Russia and other non-OPEC nations, the cartel's rhetoric appears hollow.
Wait and See
As a result of the cartel's perceived weakness, Dann believes patience is key to making money in the oil patch.
"Right now, we believe that the equity markets are discounting long-term oil prices of $18 a barrel in valuing the integrated oils," Dann said. "Worsening sentiment on the oil commodity could cause investors to discount lower long-term oil prices to value the integrated oils than they do today.
Dann's top picks --
-- continue to be attractive but "are sensitive to changes in oil prices." He rates both a buy and Banc of America Securities has provided banking services for Occidental.
Still, Dann said, "We would prefer to wait for a better buying opportunity, when and if investors would discount long-term pricing of between $15 to $17 a barrel with the XOI
oil index between $440 and $380, vs. $470 today. This implies 6-19% downside risk. Upside potential to normal valuation levels, using long-term oil prices of $21 a barrel, is 13%, implying a level of $530 for the XOI."
If OPEC doesn't come through, that's rhetoric that may be worth considering.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to