Oil traders originally cheered the news that OPEC members will meet informally this month while attending the International Energy Forum conference in Algiers. That enthusiasm has now waned, as the oil market reacts skeptically to recent soundbites from various oil ministers.
Remembering how hopes were dashed this past April when the Saudis suddenly scuttled an agreement to freeze oil production, traders are wondering whether the upcoming meeting will actually forge an agreement to stabilize the oil market, or will this be another case of "talking up" oil prices with no intention of following through?
Summer Reprieve Ends
Oil producers have enjoyed a summer of higher prices supported by interruption of a substantial portion of global crude exports. A massive wildfire in Canada, a civil war in Libya, and an effective terrorist campaign in Nigeria all contributed to reduce pressure on oil stockpiles.
Those days of near-$50 oil are over, as most of that interrupted production has come back online, and demand has begun falling as the summer vacation season ends. In addition, Iran and Iraq have both worked steadily to increase oil exports.
Aggregate oil production among all OPEC nations hit a record in August, with 40,000 more barrels of oil a day being pumped compared to July. Part of this increase came from Libya and Nigeria resuming exports. Sinking prices are renewing the cash squeeze on oil-producing nations, and rekindling the desire of those suffering most to push through some sort of agreement to limit production across the board.
The US Energy Information Administration has forecast that OPEC export revenue this year will fall to its lowest level since 2004, emphasizing that the pain of the oil glut is being felt by everyone.
Rock To The Casbah
The venue for the next OPEC attempt to freeze production is the three-day International Energy Forum conference running from September 26th to 28th. The Riyadh-based IEF hosts a global oil and gas conference every two years, According to the IEF website, "The 73 IEF member countries account for almost 90% of world oil and gas supply and demand."
Since everyone from Australia to Zambia will be attending, the conference naturally presented an opportunity for OPEC members to meet after hours to discuss a production freeze. Oil prices falling below $40 a barrel seemed to have captured the attention of OPEC, as Qatar's oil minister (who is president of OPEC) announced on August 8th that the organization will be meeting during the IEF conference in an attempt to come to a production accord. Oil prices promptly rose by $10 a barrel after then announcement.
Observing how easy it is for the major central banks to move markets with press conferences and TV appearances, Saudi officials have started playing the same game, with similar results.
The media blitz shifted into high gear this week, when Saudi foreign minister Adel al-Jubeir told reporters "I think there is a move toward a common position, toward a common effort. If other producers were to agree it is reasonable to expect Saudi Arabia to go along with it." Continuing, he said "If you want to have an impact, then all of us have to shoulder the responsibility, and I believe over the past five or six months, I believe that there has been an increasing realization that this is a collective effort."
Saudi energy minister Khalid Al-Falih, who replaced Ali al-Naimi in May, tried to manage market expectations recently, noting "I don’t believe that an intervention of significance is required. I certainly don’t advocate a cut."
Iran's refusal to be limited to sanctions-level oil production was used as an excuse by Saudi Arabia to torpedo a production agreement in Doha last April. Even though Iranian oil production has stalled below their 4 million barrels a day target, the nation doesn't want to be cast as the bad guy by the Saudis for a second time. Speaking to reporters, Iranian oil minster Bijan Zanganeh said "Iran will cooperate with OPEC to help the oil market recover, but expects others to respect its rights to regain its lost share of the market." In other words, Iran is urging other OPEC nations to freeze production at current levels, but wants an exemption until its 4 mbd goal is reached.
Russia has its long-time ally's back on the subject. Speaking at an economic forum in Vladivostok, Russian president Vladimir Putin said that Saudi Arabia should agree to a compromise where Iran is allowed to get its production back to pre-sanctions levels before joining the freeze. Getting in a dig at the Saudis' sucker punching the Doha talks in April, Putin said “Our Saudi partners at the last moment changed their view,” said Putin. “We didn’t reject the idea of freezing output. Our position hasn’t changed.”
Speaking of Russia, the nation's energy minister earlier this week had said that they did not see any reason to meet with other oil exporters regarding a production freeze, as long as prices remained near $50 a barrel. Yesterday, he reversed course and fell in line with his boss, saying that he would attend the OPEC talks in Algiers.
Iraq is also trying to boost production, to help pay for the war against the Daesh insurgency and rebuild the war-ravaged nation. Prime minister Haider al-Abadi said that Iraq was supportive of the efforts to cap oil production, but gave no overt hint that his nation would sign on.
"Never Tell Me The Odds"
The governments of the smaller OPEC nations are on the verge of collapse. Saudi Arabia and the other Persian Gulf monarchies have so far grit their teeth and dealt with the pain. The biggest question hanging over the production talks in Algiers will be, "Can Saudi Arabia put its hatred of Iran aside enough to agree on a rebalancing of the oil market?"
For its part, Iran doubtlessly enjoys painting its chief geopolitical rival as the bad guy, and is used to economic hardship. If it thinks it can gain an advantage and spread its sphere of influence, suffering from low oil prices is an acceptable price to pay.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.