It’s finally here, after many weeks, the moment the oil market has been waiting for: delegates from the world’s biggest and richest petrostates are sitting down on the outskirts of the International Energy Forum in Algiers this week to try and hash out an agreement to collectively freeze their production. We’ve been through this song and dance before, but that first effort—made in Doha, back in April—fell apart just before the finish line when the Saudis backed out, citing Iran’s lack of involvement as a deal-breaker.
This time, Iran is sitting down at the negotiating table, willing to at least discuss a production freeze now that it’s recovered most of its output to pre-sanctions levels. And after many weeks of pre-talk hype, we’ve finally arrived at the inflection point. But that doesn’t mean that anyone knows what’s going to happen next, and in fact uncertainty hangs over the proceedings heavier than ever. According to the FT, analysts are skeptical that a freeze is in the cards:
As the world’s largest oil producers descend on Algeria this week for crunch talks on ending a two-year old supply glut, Opec’s biggest members remain far apart…The Saudi delegation is only seen playing ball if arch rival Iran agrees to cap its own output at 3.6m barrels a day — a level seen as anathema to Tehran as the country chases its goal of restoring production to the 4m b/d level it pumped before western sanctions were imposed five years ago. […]
Market watchers also see signs that this week’s gathering in Algiers is about more than just jawboning the market higher after it threatened to drop back below $40 a barrel during the summer.
But that “jawboning,” as the FT puts it, already seems to be working, as oil prices are up today on the belief on the part of some experts that the chances of a deal have improved. The WSJ has more:
“Odds of a symbolic catalyst emerging from (the) OPEC meeting have improved, from negligible to possible,” Guy Baber, analyst at Piper Jaffray Cos.’ Simmons & Co. International said in a note to clients Monday.
Prices jumped as high as 4 percent in trading, the greatest degree of volatility the market has seen since those failed talks in Doha this spring, but one of the freeze’s key players is pouring cold water on those expectations. Iran’s oil minister called this week’s meeting “consultative,” better understood as “preparation…for market stabilization” than as a serious attempt at coordinating production.
However this all may be besides the point, in the end. Simply capping output won’t do anything to change the fundamental problem facing oil producers in today’s market, namely that supply well outstrips demand. Even supposing that this group of petrostates is able to put aside its misgivings and mistrust and find common ground on a freeze, the only way that might cut into the global glut would be if demand were to significantly increase, and unfortunately for OPEC and friends, demand is trending in the opposite direction.
Despite all these misgivings, we’ll be keeping a close eye on proceedings—the implications, both geopolitical and economic, are too big not to—but it will be a skeptical, maybe even squinted, eye.