If you are having trouble keeping up with all of the rhetoric in the oil market over the past two months, you are not alone. That’s the oil producers’ basic idea, create as much uncertainty as possible in a bid to scare traders from shorting oil, thereby preventing oil prices from cratering.
Lead-Up to Algiers
Oil prices bottomed in mid-February, following the slide that had begun in June 2014. The trigger was a meeting between energy ministers from Saudi Arabia and Russia, along with a couple of smaller OPEC Gulf producers. They could not agree to a production cut, so they came up with a “freeze” proposal, whereby producers would agree not to increase production further.
Although this would not take one barrel of production out of the market, it was enough to spook traders who had large short positions to cover (buy). Random statements by producers created price spikes, and the resulting “headline risk” cause short sellers to progressively cover more and more positions. The effect was a sizable price rise.
The stage was set for a formal meeting in Doha in April for an agreement. But Iran, which had recently been released from sanctions, said it would not agree to such a plan until it reached its pre-sanction level of four million barrels per day. Iran did not even attend the meeting and It ended in failure because Saudi Arabia refused to enter into an agreement without Iran’s commitment.
Prices did not crater though because it was followed by a confluence of supply outages around the world, including sabotage in Nigeria, and the wildfires in Canada, which suddenly took more than three million barrels per day off of the market. Instead, prices continued to rise and top $50 per barrel in late May.
OPEC met in early June and it was a non-event. However, it was attended by Saudi Arabia’s new energy minister, Khalid Al-Falih. Without the prospect of the freeze, and with the expectation that the disrupted oil would be restored, prices began to fizzle. By early August, oil prices had dropped by more than 20% from their peak in late May, briefing dipping below $40/b.
In an unusual move, OPEC released a press statement on August 8th, in which OPEC’s new president, HE Dr. Mohammed Bin Saleh Al-Sada, Qatar’s Minister of Energy, announced that an informal meeting of OPEC member countries would take place on the sidelines of the 15th International Energy Forum in Algeria from 26 to 28 September 2016.
The statement created only a momentary price reaction, and so the Saudi Press Agency reportedly emailed a draft report to journalists, which contained a quote from Mr. Al-Falih, stating:
"We are going to have a ministerial meeting of IEF in Algeria next month, and there is an opportunity for OPEC and major exporting non-OPEC ministers to meet and discuss the market situation, including any possible action that may be required to stabilize the market."
The market began its climb toward the $50 level could not quite make it there. The suspicious element about the announcement was that it mentioned a meeting almost two months away, whereas it would seem the issues could be addressed right away if there were agreement on a solution.
For the weeks that followed, more statements were released in succession, hinting of a deal. At the G-20 conference in early September, Saudi’s Prince Mohammed bin Salman (MbS) met on the sidelines with Russia’s Vladamir Putin to sign an agreement to “cooperate” on the oil market.
The litany of hints and statements without any concrete detail progressively led traders to doubt that OPEC had a solid plan under consideration. Instead, it appeared to be little more than a bluff.
The Wall Street Journal published an article last week, "Is OPEC All Talk?" It quotes a senior OPEC official saying, "OPEC has to talk and talk."
Heading into this past weekend, Saudi Arabia said it didn’t expect OPEC and other prominent non-cartel producers, such as Russia, to clinch a deal on Wednesday. Russia's energy minister said he did not expect an agreement at the upcoming OPEC meeting in Algiers. "We will be able to discuss the current situation; it's only the first stage." OPEC Secretary General Mohammed Barkindo had also said, "It will be an informal meeting, it is not a meeting for making decisions."
A report was floated that Saudi Arabia had agreed to cut back its production to around ten million barrels per day if Iran would freeze its production at 3.6 million barrels per day. Iran’s president had been on record stating Iran would not freeze output below four million barrels per day. The market dropped 4% on Friday.
Algiers
The informal meeting is on Wednesday and there appears to be no consensus on a freeze or cut. To the contrary, it was reported that disrupted oil in Nigeria, Libya and Iraq could be restored to a greater or lesser amount in the weeks and months ahead. There is potential for a gain of over one million barrels a day, which swamp the oil market, given that OPEC’s supply-demand projections for 2017 would not balance at August’s production level.
Iran’s oil minister, Mr. Zanganeh, said Wednesday’s talks are negotiations ahead of OPEC’s regularly scheduled meeting on November 30th. The Algiers talks “can be regarded as preparation,” Mr. Zanganeh told Shana, a state-run media service reporting on the Iranian oil industry. “The ground is being paved for market stabilization."
Algeria's energy minister Mr. Noureddine Bouterfa said, “We can’t come out empty-handed,” warning that oil prices could drop from $45 a barrel today back into the $30s if OPEC fails to come to terms this week. "Every state in the organization agrees on the need to stabilize prices; it just remains for us to find a format that pleases everyone.”
Conclusions
Given this background and these issues, the prospect of any meaningful deal to allocate production and shore-up prices seems far-fetched. On the contrary, OPEC may soon be facing a much bigger headache, the restoration of output from disrupted members, than Iran’s increased contribution to world supplies this year.
Check back to see my next post!
Best,
Robert Boslego
INO.com Contributor - Energies
Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
