Once again, OPEC members are discussing a potential deal to lift oil prices. A total cut seems to be off the cards, but some freeze in production levels could be possible in the gathering on the sidelines of a conference in Algiers.
Given the past, there are many reasons to doubt this. Here is what’s going on.
Algiers is not Doha
The good news for oil bulls is that the tone is much more positive than in April. Then, OPEC and non-OPEC members, namely Russia, tried to reach a deal in Doha, Qatar. Iran that just returned to international markets wanted more time to go back to pre-sanctions capacity. The Saudis clashed with them and broke up the talks. The Russian were dismayed at their waste of time.
This time is different. All sides are calmer, and the tone is more constructive. Iran is getting closer to its desired capacity, and the Saudis are more flexible. Other OPEC members are much smaller producers that want others to cut.
Russian attitude, US production
However, other things have changed as well. Russia seems reluctant to participate. After being bitten in April, the vast oil-rich country wants OPEC to reach an agreement first. However, without a Russian freeze in production, an OPEC decision has less of an impact.
The original drop in oil prices came due to the growing US shale oil industry. The additional supply coming out of the Dakotas and further south created a glut. The Saudis initiated a price war back in November 2014. This eventually triggered a decrease in US oil production, but other things have happened as well: the industry showed resilience and also showed its flexibility. When oil prices fall, production falls, and when it rises production rises as well.
Also, this expensive way of extracting oil has become less expensive. A drop in oil rigs did not result in much less production but efficiency benefits.
Even if there is a deal
The optimistic scenario is that OPEC will reach a meaningful deal. Once again, Russia’s reluctance is important. They will not jump on the wagon with a recession still hurting the economy. And the US could just ramp up production, enjoying temporarily higher prices and eventually pushing them down.
But the US and Russia should not be the only concern to oil bulls in the case of a deal: implementation is critical. Signing papers is one thing, and indeed not increasing production is another. This has already happened in the past. The two biggest producers, Saudi Arabia and Iran, find it hard to agree on how to measure the level of production.
Every oil rise, a selling opportunity?
All in all, the conclusion is that any rise on rumors of a deal or even celebratory pictures of signatures and hugs could serve as a selling opportunity. There is still a glut of oil, extremely high storage levels and a lack of trust between big producers. In this environment, a real rise in prices seems implausible.
WTI Crude Oil has ranged between around $40 to around $50 for quite some time. A sustained rise above $50 is what oil producing countries are aspiring to. However, you don’t always get what you want. That Rolling Stones sond concluded the Republican National Convention and could be quite relevent for the gathering in Algiers.
What do you think?