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Oil Production Freeze In September? Be Wary Of Another Fiasco

By Ellen R. Wald, Ph.D.CommoditiesAug 09, 2016 06:46AM ET
www.investing.com/analysis/oil-production-freeze-talks-return.-be-wary-of-another-fiasco-200146812
Oil Production Freeze In September? Be Wary Of Another Fiasco
By Ellen R. Wald, Ph.D.   |  Aug 09, 2016 06:46AM ET
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The usual OPEC suspects—Venezuela, Ecuador, and Kuwait—are pushing for a revival of the oil production freeze talks that took place last April in Doha, Qatar. As usual, any time someone in OPEC says anything about freezing production, hungry speculators push up the price of oil. They did the same on Monday.

Savvy investors, however, should be wary of such news. Market watchers saw a similar situation unfold earlier this year. This past winter, when news first emerged that OPEC and non-OPEC members might discuss a production freeze, the price of oil was at its lowest—$28 a barrel. By the time the talks took place months later, oil had rallied almost 50% to over $44 a barrel. This was largely based on speculation. After the talks fell apart, oil promptly fell 7%. This time around, investors should approach news of oil production freeze talks with great skepticism. Do not buy into the idea that financial conditions, fundamentals, or even political policy goals have changed simply because an OPEC minister suggests oil production freeze talks.

At first, it seemed like the oil market had learned its lesson and was not taking this news seriously. When news broke on Friday, the price of oil fell most of the day before ending up nearly unchanged. This week, however, speculators seem buoyed (oil rose 2.5% on Monday) by the idea that OPEC members might agree on a production freeze when they next meet in Algeria on September 28, at the International Energy Forum.

Why the Doha Oil Freeze Failed

Last time around, the news media reported that tensions between Iran and Saudi Arabia ruined the deal at the last minute. According to that narrative, the deal was ready to be signed without Iranian participation, but Saudi Arabia supposedly scuttled it at the eleventh hour when it suddenly changed its mind and decided that Iran had to agree. This inaccurate narrative fed speculation that resulted in the 7% price drop.

In reality, the Doha talks failed because none of the major oil producing countries (Saudi Arabia, Russia, Iran, and Iraq) had any real incentive to agree to cap their production. From the start, Ali al-Naimi, then Saudi Arabia’s oil minister, made clear that all OPEC nations (including Iran) had to participate for the production freeze to even have a chance. He was willing to participate in the talks without Iran, in hopes that Iran might be convinced to join in, but he made it clear from the start that no production freeze could be successful without Iran’s participation. Bijan Zangeneh, Iran’s oil minister, also made it clear from that start that Iran would not even consider participating in an oil production freeze before the country’s oil production reached pre-sanctions levels. The Doha talks never had a chance.

Iran’s Position on this Oil Freeze

Some OPEC members believe that conditions have changed enough over the past six months that the idea of a production freeze is now realistic. This is wishful thinking. Iranian production is higher, but it is not yet at pre-sanctions levels. It seems Iran will not be able to push production higher and may not even be able to sustain current levels much longer. Iran’s financial situation is still dire and the country needs more oil revenue. The only way they can get that kind of oil revenue is to increase Iranian production at the expense of others. A production freeze will not accomplish that goal, so Iran has no incentive to agree.

Saudi and Russian Oil Freeze (Non) Interests

Saudi Arabia has no incentive to agree to freeze production, particularly as it just cut the price of the Arab Light crude oil to Asian customers. The country is not facing a financial crisis of any severity. Saudi Arabia can continue to make more money per barrel off oil it sells than any other nation. Low prices also feed Saudi Arabia’s burgeoning refining and petrochemical businesses. The Kingdom can continue to spend cash reserves to fund its government and obtain low interest loans for major development projects for several years.

Russia, the largest non-OPEC player, is always a wild card when it comes to agreements with OPEC. The country had reneged on oil production deals before. Even when Energy Minister Alexander Novak says Russia is interested in participating in oil production freeze talks, Russia’s word cannot be trusted.

OPEC’s Take on Oil Freeze

OPEC’s current president, Qatari energy minister Mohammed al-Sada, was being diplomatic when he said that, “OPEC continues to monitor developments closely, and is in constant deliberations with all member states on ways and means to help restore stability and order to the oil market.” This does not mean OPEC is any closer to an oil production freeze than it was last week or last month. Al-Sada is simply towing the party line, and investors should not take his statement as an indication of any action.

The bottom line: remember the lesson from Doha. Unless all of the big oil producing nations—Saudi Arabia and Russia, along with Iraq and Iran (to some extent)—truly believe that an oil production freeze is in their country’s best interests, it will not happen.

Oil Production Freeze In September? Be Wary Of Another Fiasco
 
Oil Production Freeze In September? Be Wary Of Another Fiasco

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Rune Fardal
Rune Fardal Sep 06, 2016 7:01AM ET
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What does it take for Oil to go down?..1. More oil. Ships and stores are full, we have oversuply..2. No actual talks about freeze...Any move upwards now is pure speculation.
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Bill Sc
Bill Sc Sep 06, 2016 7:01AM ET
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Why would OPEC restrict their sales so that non OPEC nations can increase their sales at a higher price? It is not common to help your competition grow stronger. Besides if there was an agreement the OPEC cheating will keep supply up. Only way price will go up is for demand to outpace supply and create shortage that can't be filled. Right now there is just too much oil.
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Mark Kuppe
Mark Kuppe Aug 15, 2016 1:06PM ET
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Great article and it mirrors my exact sentiments. There is always a chance that this time they'll try to (for whatever reason) actually do (ie. freeze production), but as identified in the article, the motivation is sparse. They might talk it up more, but I'm an odds player and the odds say that this OPEC meeting, like the rest before it, is bogus!
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follow trade
follow trade Aug 12, 2016 11:20AM ET
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i do not if any one has followed her advice , but if some one followed then god save them :(
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Mark Scott
Mark Scott Aug 10, 2016 9:08PM ET
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Are u saying Russia's word cant be trusted????? how about u get over yourself and work out Russia isnt the problem here. Russia havent been a problem for years. Russia have drawn a line in the sand and fair enough. WW3 is approaching rapidly and the people dont know. Putin pleaded with western journalists to report the dire situation but silence. Ellen u have no idea. The US is months away from upgrading its star wars missile defense system under NATO with a lovely weapon system that can shoot down any Russia ballistic missiles, What u dont hear from the media is this system can be turned into an offensive system with a switch. But this would violate the agreement post cold war Russia and US have. LINE IN THE SAND.. Oil dropped like a rock to halt Russia's ability to build strength. Like every economic attack on Russia it backfired. You claim Russia's word cannot be trusted. When has Americas word been trusted, or Saudi Arabia's word or Israels word or whatever. You have no idea.
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Aug 10, 2016 9:08PM ET
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^^^ Conspiracy theorist, listens to crazy people on the radio.
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demis iliadis
demis iliadis Aug 10, 2016 8:07AM ET
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Dear Ellen, I have read several of your articles and information provided; thank you for this. With all the respect to your vast knowledge on oil, I have come to the conclusion that your judgement is clouded by a biased attitude towards lower oil prices. In your analysis you seem to always downplay factors that could lead to higher oil prices and overstate factors that could make the oil price tumble.
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follow trade
follow trade Aug 10, 2016 8:07AM ET
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thanks Demis, i share the same opinion, that why i prefer Ellen should just put the facts and leave market for guessing. its is from last 5-6 times whenever she conclude something and market does the reverse bango. . @today if the inventory comes bad then market will go up in the hope that production cut is highly probably and if comes good market knows the way:)
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Aug 10, 2016 8:07AM ET
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And what factors point to higher price, Demis? Nothing, nada.
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Kathy Zhang
Kathy Zhang Aug 10, 2016 8:07AM ET
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One thing is interesting, she ignored the fact that the oil price rallied even after Doha oil freeze failed. So conclusion of oil price will plunges due to Freeze talk fails is obvious not certain.
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Benson Njonjo Ndehi
Benson Njonjo Ndehi Aug 10, 2016 8:07AM ET
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Strong US government spending.
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Kathy Zhang
Kathy Zhang Aug 09, 2016 1:45PM ET
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The oil price dropped almost 7% on the day when Doha Oil Freeze failed. However, it turned to go up next day and kept going up till early July. ..Market just shrugged off the failure of Doha meeting. ..Failure of further oil freeze talk if any, won't bring long term negative effect on oil, just temporary effect.
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Patrick Robinson
Patrick Robinson Aug 09, 2016 1:02PM ET
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Great article with very sound logic. Thanks !!!
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tony layoun
toni Aug 09, 2016 12:50PM ET
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can you please disclose your positions &/or interest,...
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Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Aug 09, 2016 12:50PM ET
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None! :-)
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David Guaman
David Guaman Aug 09, 2016 12:50PM ET
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LOL
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Aug 09, 2016 12:50PM ET
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What is so funny, David?
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Chart Harmonics
Chart Harmonics Aug 09, 2016 11:07AM ET
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Sure - this makes perfect sense and has a strong precedent. But oil is a commodity that is traded, not a stock that is invested. So traders will (and should) buy the rumor, then sell the news. Perfect opportunity to go long crude, then short it when the meeting occurs.
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Aug 09, 2016 6:52AM ET
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Putin plays and here by himself ... some wanted to go down prices of 'petroleum, to hit economically the Russia, ... remember one charlatan from USA, he called the RUSSIA, large gas station ? but no one thought ... ...*** Russia even with price 28 dollars / barrel, monetize, because the pumping has low cost AND for example, compared with the US where a price below 50 dollars / barrel, the pumping is 'loss' and not almost has no interest..Putin as a leader, and 'long' the best in recent 50 years, sees that ....."The fall in prices due to the assessment ... .that the development of the global economy is slowing rapidly.and that the utilization of slate beneath 50 / barrel is 'banned' ... .so the RUSSIA have give (knockdown) slap ... the price of oil and together ... in all states with economics that have oil as 'basic' product, though not nobody admitting it !!!.Russia defeated !!!..*** So now remains is one 'HOT CONFLICT' ... . physico-mathematical logic says self !!!
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