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.
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.
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 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 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.
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