Crude Economics
Petrostates Ramp Up Oil Freeze Rhetoric

We’re one week away from a meeting to hammer out a petrostate oil production “freeze” deal, and both the hype and speculation are growing. Interestingly, it’s delegates from the petrostates themselves doing most of the talking, perhaps because they know that even if they’re unsuccessful in finding common ground for output coordination next week, merely by building up expectations in the run-up, they’ll be able to nudge oil prices upward.

We saw this same pattern play out this Spring, when constant talk of a freeze was enough to spur a minor price rebound but was ultimately unsuccessful in building consensus between OPEC members, Russia, and the handful of other petrostates that assembled in Doha for round one of these talks. So what, you might ask, is different this time around?

It’s been five months since those failed Doha talks, during which time bargain crude has continued to drain petrostates’ national budgets and pressure these countries’ leaders to try and address the global glut that precipitated oil’s price collapse in the first place. According to CNN, things are especially dire for Russia, whose “rainy day fund has shrunk to just $32.2 billion this month,” down from more than $90 billion two years ago. Moscow’s runway isn’t long, either, as experts believe that fund will fall to just $15 billion by the end of the year. That’s the context in which to parse the sanguine statements of Russia’s energy minister about the prospects of a freeze agreement.

The thing is, Moscow wasn’t the stumbling block back in April. Saudi Arabia was. Specifically, the Saudis were concerned about Iran’s refusal to join the collective effort. This time around, however, Tehran has seen its own production return close to its pre-sanctions levels, and according to OPEC’s Secretary General, is now committed to working towards “stabilizing” the global oil market. In other words, now that it’s no longer capable of increasing its own output much further, Iran is willing to agree to… well, not increase its output much further.

Problem solved? Not quite. Even if Saudi Arabia and Iran make nice in Algiers next week, a lingering question remains: how exactly does setting an upper limit on this group of petrostates’ production actually inflate prices. Venezuelan oil minister Eulogio Del Pino said this week that a freeze “could increase oil prices by between $10 and $15 dollars per barrel,” and to the extent that it changes market psychology, that could be possible.

But Del Pino also said that the global oil supply would “need to go down 9 million barrels per day” for the market to balance itself. A freeze won’t do that—it will only prevent further production increases from those that sign onto the deal—and with Saudi Arabia pumping out and exporting record volumes and Libya boosting its own production a whopping 70 percent since last month, imposing an upper bound at today’s numbers means even less than it would have back in April.

Even if OPEC makes next week’s informal session in Algiers formal, as Algeria’s energy minister has speculated it might, it will struggle to effect the kind of change its more cash-strapped members (looking at you, Venezuela) so badly want and need. For now, the only thing petrostates are doing is talking about pushing prices up, and in the end that may be all they’re capable of doing.

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