In August, when members of the Organisation of Petroleum Exporting Countries (OPEC) floated the idea of meeting once again to discuss the possibility of a production freeze, oil prices skyrocketed, ending the bear market that had just formed. WTI and Brent subsequently jumped more than 20 per cent in a few weeks, kicking off a bull market.
Still, oil analysts dismissed the meeting as more of a bluster. Having seen OPEC try and fail to reach an agreement for more than a year, and the dynamics between OPEC members not having appreciably changed from the last time they tried to negotiate, the prospects of a deal seemed slim to nil. And right on cue, after oil prices jumped on the news that OPEC and Russia would meet on the sidelines of an energy conference in Algeria at the end of September, several representatives from OPEC nations seemed to back off from the notion of a freeze.
Iraq’s oil minister said that Iraq still had much more room to grow production and wouldn’t be interested in a deal. Iran stuck to its line that it needed to reach pre-sanctions levels. Saudi Arabia said that market intervention was not necessary. Russia also said that a freeze deal was not needed.
However, all parties involved seem to have changed their minds a bit, or at least their tone, since oil prices began falling again in late August. Crude fell back before hitting $50 per barrel, trading back down to the mid-$40s. Oil traders were calling OPEC’s bluff, having been burned too many times by rumours that they would seek coordinated action to prop up prices only to see nothing come from the talk.
But the array of comments from OPEC and Russian officials over the past week could signal that a real effort might be underway to reach a deal on freezing production. The Iraqi Prime Minister said his country would support a deal; Iran will attend the meeting; and Saudi Arabia’s foreign minister said that his country should sign onto a deal. And on Friday, the potential for an OPEC deal received an endorsement from a surprising source, Russian President, Vladimir Putin, threw his weight behind a production freeze.
“From the viewpoint of economic sense and logic, then it would be correct to find some sort of compromise,” Putin said in an interview Bloomberg reported.
“I am confident that everyone understands that. We believe that this is the right decision for world energy,” he added.
Putin’s voice may come as a surprise, but he insists that Russia supported a freeze deal back in April.
“Our Saudi partners at the last moment changed their view,” he said.
“We didn’t reject the idea of freezing output. Our position hasn’t changed.”
And crucially, Putin suggested that Iran should be granted a bit of flexibility with the freeze, allowing it to boost output further as it continues to recover from years of international sanctions.
“Iran is starting from a very low position, connected with the well-known sanctions in relation to this country,” Putin said.
“It would be unfair to leave it on this sanctioned level.”
Putin reportedly also said that he would meet with Saudi Arabia’s powerful Deputy Crown Prince Mohammed bin Salman in China at the G20 summit in a few days and recommend that they agree to those terms.
“He is a very reliable partner with whom you can reach agreements, and can be certain that those agreements will be honored,” Putin said of the prince.
Of course, as has been pointed out ad nauseam, the freeze deal would do little in addressing the glut of global oil production. Just about all the participants in the potential freeze are producing at their limits, with several of them having ratcheted up production this year. Capping output at record levels does very little to restrain output. Nobody is actually considering a cut.
Yet, oil prices will move anyway. Just as OPEC managed to spark an oil price rally in February when they floated the idea of freeze negotiations to be held Doha, OPEC could be interested in talking up another price rally. After all, discussion of the Algeria meeting sparked a 20 percent rally in crude prices last month. OPEC might see the upside of agreeing to a deal, even if (or especially if), it has no teeth. The psychological impact on the oil markets could lead to further price increases while not actually requiring any sacrifice.
All participants seem to be coming around to that idea, which suggests that the chances of a successful agreement are not as much of a long shot as many oil analysts thought just a few weeks ago.
Nigeria, Venezuela are the worst hit as crude price hovers below $50 per barrel. Both countries’ economies have dipped into recession and the government of Nigeria is looking for how to revive the economy and comes out of the recession as soon as possible.
Oil prices have fallen from over $120 per barrel in June 2014 to less than $25 per barrel in January 2016. It began to rise from March 2016 but it hasn’t reached a high of $70 per barrel which many analysts had predicted would save many producers from economic recession.
Meanwhile, expectations for the success of the upcoming OPEC meeting in Algeria continue to seesaw, with comments from top officials from member countries continuing to alter oil market sentiment.
As recently as a week ago the prospects for a deal looked slim. But the favourable comments from several OPEC nations may have cracked open the door to deal just a bit. Earlier this week Iraq’s Prime Minister said that his nation would support a production freeze in Algeria. Separately, Iran said that it would attend the meeting, and although it has not yet deviated from its longstanding position that it would not sign on to a deal until it reached its pre-sanctions production levels, its attendance was seen as a positive sign.
On Thursday, Saudi Arabia, OPEC’s most influential member, also boosted the odds of a deal when its foreign minister said that OPEC members were moving closer to an agreement. “I think there is a move toward a common position, toward a common effort,” Adel al-Jubeir said at a conference in Tokyo, according to Reuters. “If other producers were to agree it is reasonable to accept Saudi Arabia to go along with it.”