Trading on oil – could the world’s leading producers really strike a deal to freeze output?

Oil traders are being teased with the prospect of a production freeze again, just a few months after the market was led on a merry-go-round of speculation and rumour ahead of the Doha talks.

In April, after weeks of reports indicating leading exporters would curb output, those much-hyped Doha talks left markets disappointed as Iran and Saudi Arabia failed to strike a deal.

Now, ahead of talks due to take place later in September, traders are once again being baited with an output freeze.

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Algiers talks

 

Energy ministers from the Organization of Petroleum Exporting Countries  (Opec) and Russia, the world’s third-largest crude producer, are due to hold ‘informal talks’ on the side lines of a conference in Algiers in late September. It’s here that the promised freeze discussion will take place.

So what are the chances of Opec freezing output in co-ordination with other majors?

Last time it was the frosty relations between Saudi Arabia and Iran that scuppered the deal, as neither was prepared to give up market share. Iran has only just got back into the exporting business after years of sanctions.

Saudi Arabia, as the de facto Opec leader, was keen to freeze and looks like it would be happy again as long as others sign up to any agreement. Riyadh has largely given up being the swing producer, changing its own output to manage prices.

Iraq has also backed an output cut, with prime minister Haidar Al-Abadi voicing support. Various other members who need a higher oil price, such as Venezuela and Ecuador, have been long-standing supporters

Russia

 

The joker in the pack here is Russia. It’s not a member of Opec but wields considerable influence. President Vladimir Putin has said he would like to achieve a deal with Opec to freeze supply, with an exception for Iran.

“I would very much like to hope that every participant of this market that’s interested in maintaining stable and fair global energy prices will in the end make the necessary decision,” he told Bloomberg in an interview last week. Russia has considerable muscle regionally, notably with Iran, so could be the key agent in getting a deal done between rival exporters.

At the G20 on Monday (September 5th), crude futures surged on news that Russia and Saudi Arabia were to release a joint statement. In the end the news disappointed and oil gave up gains – the pair simply said they would set up a working group to monitor the oil market. 

As the news unfolded Nymex crude jumped from the $44 handle to $46.50, before retreating to below $46 after the announcement fell short of expectations. Such is the febrile nature of the oil market right now, these swings are not that unusual. Volatility may increase as we get closer to the talks in Algiers.