Why Oil Producers Could Reach a Deal Next Week (And Why It Won’t Matter)

Unless you’ve been living under a rock, you should know that major oil producers around the world are feeling the pinch after oil supply has repeatedly exceeded global demand. So far it has pushed crude oil prices down from $114 in 2014 to below $50 per barrel in 2016. Yowza!

Though production has declined in the U.S. and Canada and prices have recovered from its $28-per-barrel lows, current oil price levels are still too low to be sustainable for most oil producers.

The International Energy Agency (IEA) has also warned that the oil supply glut will persist into late 2017, well over initial estimates, thanks to declining demand from major energy users like China and India and record output levels from OPEC’s members.

On September 28, the last day of the International Energy Forum in Algeria, major oil producers including Russia and members of the Organization of the Petroleum Exporting Countries (OPEC) will have a meeting on the sidelines in the hopes of addressing oil oversupply concerns and prop up crude oil prices.

Market players aren’t holding their breaths after a highly-anticipated meeting in Vienna last June turned out to be an overhyped dud. Still, it looks like the stars are lining up for an actual output next week:

Major players are showing willingness to cooperate

Russia and Saudi Arabia, the world’s largest oil-producing countries, sent a joint statement earlier this month saying that they could limit their output in the future. Though no details were released, the cooperation was a step forward seeing as both countries have been fighting a proxy war in Syria.

Putin himself is all for cooperation, seeking “some sort of compromise” and even allowing Iran to recoup from its losses, believing that “Iran is starting from a very low position…it would be unfair to leave it on this sanctioned level.” Meanwhile Russia’s Energy Minister Alexander Novak said that “Russia would be ready to cap output at the level of any month in the second half of this year.

Iran, OPEC’s third largest producer, is also willing to play nice. Iranian President Hassan Rouhani recently shared that they welcome any move aimed at market stability and “improvement of oil prices based on justice, fairness and fair quota of all producers.” If you recall, Iran said “no thanks” to the meeting earlier this year after its oil sanctions had just been lifted. Analysts believe that the mention of “quota” hints that Iran may push for a return to OPEC’s country-specific quota system implemented in the past.

Other OPEC members are also feeling optimistic. Venezuelan President Maduro said last week that “members are close to a deal” while Iraq’s OPEC Governor Falah Alamri said that “This time I think (things are) a little bit different because circumstances are a little bit better, helping (producers) to reach a deal.

There are more details available

It’s not just an excuse to eat tajine. Both Russia and Iran have specifically hinted at using country-specific quotas, while some OPEC officials are talking collective output ceiling and production freezes. OPEC Secretary-General Mohammed Barkindo even has a time limit, saying that any output freeze deal will last until October 2017.

“Informal” meeting could turn into “formal” talks

OPEC’s Barkindo and Algerian Energy Minister Noureddine Bouterfa have hinted that OPEC could announce an “emergency meeting” should the players reach an understanding. This is a turnaround from Barkindo’s earlier statement that next week’s huddle is an informal meeting rather than a decision-making meeting.

Historically, meetings in Algeria have produced results

In 2004 OPEC announced a surprise supply cut amidst growing Chinese demand, which resulted to a jump in oil prices and a reversal of the decision a few weeks later. Then, in 2008 OPEC participants announced a supply cut of 4.2 million barrels per day, which also resulted to higher oil prices.

As good as the chances are for a possible deal next week though, many analysts still believe that any announcement likely won’t have a significant impact on the global oil oversupply issue.

For one thing, the participating countries are likely more cooperative nowadays because output cap or freezes won’t affect their current production rates anyway.

Russia’s output in September registered at 11.09 million barrels a day, the highest monthly average since the Soviet era, while Saudi Arabia is also pumping record high levels of crude.

Libya, hit by political unrest, is also about to recover its export terminals while Nigeria is slowly recovering its oil production levels after militant groups have halted their attacks. Heck, even Iran is close to producing at its pre-sanction levels!

These production levels suggest that the major players are more willing to “cooperate” because they can take any restrictions coming their way. At this point, imposing any production or output freeze would be like requiring athletes to match their personal best in each competition.

Another reason why an agreement likely won’t have teeth is that OPEC’s “quotas” are widely regarded as “recommendations” and are regularly violated by its members. And since it’s hard to accurately monitor each members’ monthly production levels, it won’t take much for the players to exceed these quotas should they feel the need to do so.

So while there’s reason to expect some sort of arrangement between the biggest oil producers next week, it’s not likely that the overall oil oversupply picture will change. However, this doesn’t mean that oil prices won’t react to the news.

If major oil players signal enough optimism over a “rebalancing” in the oil markets and pinky swear to show more cooperation down the road, then oil bulls might pounce at the idea. On the other hand, any vague and/or boring fanfare about nothing could further disappoint oil traders and cause more selloff for the Black Crack. Last but not the least scenario is postponing any formal announcement until the November 30 OPEC meeting in Vienna, which would subject oil prices to more uncertainty for weeks.


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