|By TAP Staff| Oil prices have never been so stable as they are now since the breakup of Bretton Woods system in 1971.
Despite major geopolitical tensions in Libya, Syria, Iraq, or the Ukraine, global crude oil prices have been remarkably steady in the past three and a half years. Global oil prices have not been this stable since the break-up of the Bretton Woods system in 1971, Bank of America-Merrill Lynch said in a report.
Prior to 1971, oil prices and currencies were quasi-pegged to gold, a vastly different global financial architecture compared to today. The Merrill Lynch attribute this to both macro and micro. On the macro side, massive monetary easing, wide currency fluctuations, or muted inflation have helped depress vol across all asset classes. At a micro level, a more diverse oil demand base, a break away from OPEC country quotas and normalizing inventories help explain it.
Once upon a time, OPEC supply responses required a change in country quotas, something that would happen twice a year after arduous negotiations. However, after a major discord in June 2011, country quotas were put on hold.
A subsequent December meeting then set an overall production ceiling of 30 mn b/d on top of an existing aggregate production quota of 24.85 mn b/d. In effect, key swing producers (Saudi, UAE, and Kuwait) were handed a 5+ mn b/d band to help balance the 93 mn b/d global oil market. So Saudi output in started to track prices, world production volatility collapsed, and the correlation of output across OPEC countries fell apart.
According to the report, the absence of a quota since the inconclusive meeting in June 2011 has increased output flexibility, likely contributing to lower oil price volatility. Total OPEC-11 production at the time of this meeting was running at 26.62 million b/d, 1.77 million b/d over the group’s combined existing 24.85 production quota.
Saudi Arabia, with 2.5 million b/d spare capacity at the time, was already producing 1.8 million b/d over its quota but still pushed to increase production targets to make up for the Libyan supply shortfall. Most other countries opposed. When OPEC met again in December 2011, an overall OPEC production ceiling of 30 million b/d was agreed, 3.49 million b/d over the previous quota and 1.66 million b/d below actual production at the time.
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