“Whatever it takes” – can Draghi’s magic words work in the oil market too?

Saudi Arabia’s finance minister says Opec will do “whatever it takes” to bring the oil price under control. Will it succeed? John Stepek investigates.


Can Saudi Arabia and Russia control the oil market?
(Image credit: © 2016 Bloomberg Finance LP)

"Whatever it takes".

Those three little words have become the "go-to" phrase for anyone who wants to draw a line in the sand of financial markets.

They acquired their mystique when Mario Draghi, boss of the European Central Bank, used them successfully to demonstrate his determination to protect the euro in July 2012.Markets backed off, because they believed him.

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Now saying "whatever it takes" is themarket equivalent of Gandalf planting his staff in the ground and bellowing, "YOU SHALL NOT PASS!" to the Balrog in Lord of the Rings.

And now Russia and Saudi Arabia have unleashed the power of "whatever it takes" on the oil market.

Can they back it up with action? Or will markets call their bluff?

Oil producers of the world unite

None of the participants would have enjoyed doing that. There are a lot of risks involved. Firstly, can you trust your fellow cartel members? If you don't produce oil, but customers still want it, there's a big temptation for your erstwhile allies to go behind your back particularly the ones who are under the most financial pressure.

Secondly, even if your partners don't stab you in the back, there's a lag between cutting production and prices going up (and no guarantee that your efforts will work). So you immediately see your revenues fall even further than they already have. That's no fun either.

Finally, of course, the more you try to wield your power in the market, the more you run the risk of alienating consumers, who try to find alternative suppliers either US shale producers, or even alternative forms of energy.

So far, the oil barons appear to have managed to stick to the plan indeed, Saudi Arabia has been "over-complying" cutting by more than expected. But the oil price has been distinctly wobbly of late, and it looks as though it could do with a bit more cajoling higher.

Yesterday, Saudi Arabia's energy minister, Khalid al-Falih, announced that he expects the production cuts to be rolled over until at least March 2018, longer than had been expected. And that's when he used Draghi's magic words:"The producer coalition is determined to do whatever it takes to achieve our target of bringing stock levels back to the five-year average."

Ultimately, reports the Wall Street Journal, the biggest Opec producers Kuwait and Iraq, as well as Saudi Arabia, have a price target of around $60 a barrel in mind. They reckon that's the "Goldilocks" price at which US shale producers will survive, butstruggle to increase production hugely, while Opec governments will make enough money to boost spending at home.Moreover, Saudi Arabia wants $60 a barrel to that it can get on with listing the state-owned oil company, Aramco.

Markets liked the news. The price of Brent crude the European oil price benchmark rose to more than $52 a barrel, having hit a five-month low of less than $47 in March this year. Meanwhile, the US benchmark, West Texas Intermediate, rose to above $49.

However, it's a tricky business. At the end of the day, Opec can influence the oil market but it can't control it and it certainly can't set the price. And the weakening US dollar also helped the oil price there was some disappointing manufacturing data and it sent the US currency lower, which tends to be good news for dollar-denominated assets.

Oil prices might just have found a healthy medium

Kazakhstan has already warned that "it could not join a prolonged reduction on the same terms", reports Reuters.But overall, says one oil broker, "when the two biggest oil producers of the world reach a consensus on the extension of a supply cut, the market will listen".

Meanwhile, there's another reason to be fairly bullish on oil prices the rest of the market is pretty gloomy. Speculators are making the most bearish bets on the oil market since records began (admittedly, that's only in 2011, so a much shorter track period than it might seem).

When more people are bearish than bullish, you tend to get bigger reactions to bullish news (obviously the same goes for the other way around). It means there are more people caught on the wrong side of the trade, and more potential for them to have to run to the other side sharpish.

Perhaps more importantly, it increasingly feels as though Opec and Russia have decided that they cannot just sit back and hope that prices recover to a level that they are comfortable with. This joint decision demonstrates that they really are keen to do "whatever it takes".

That doesn't mean that the oil price will rocket higher. The cartel wouldn't want that because it would rapidly encourage a reaction from US shale producers. Instead,Capital Economics reckon that the price of crude "will drift up slowly in the next few years as demand remains healthy."

What's the upshot for investors? The big recovery has already happened in the oil sector. We're not looking at bargain basement prices for near-dead shares anymore. But if you are tempted to buy big oil majors for the dividend yields (which remain pretty tasty-looking) then I suspect that you're safe to do so.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.