Experts do not expect a major impact on oil price
August 17, 2016: The past week saw OPEC announcing plans for an informal meet at the International Energy Forum in late September. The announcement comes at a time when Saudi Arabia is pumping a record amount of oil and Iran is resuming production faster than expected — a strong sign neither is likely to easily entertain the idea of controlling production, though members like Venezuela have been pushing for talks in a new pricing mechanism for a while now.
The hope of a deal that would tighten oil production pulled up the prices last week. Though the market reacted positively, experts do not expect much out of the meeting.
Michael Wittner, expert on oil and products, Societe Generale feels the OPEC meeting will have little to offer for oil producers. After the meeting was announced, Saudi Energy Minister Khalid al-Falih said the kingdom is open to cooperation with OPEC and non-OPEC countries, including any possible action that might be required to stabilise the market.
“These comments were similar in tone and content to al-Falih’s comments after the last OPEC meeting in June. Venezuela and others may push for a freeze again. However, similar to April, a freeze would only be a boost to market sentiment. Russia, Iraq, and Iran are close to it, and Saudi output will go down anyway after the summer peak. So a freeze would not have any impact on actual crude supply,” remarks Wittner.
For the uninitiated, there was talk of a deal earlier this year by which output would be frozen at maximum levels although Iran was not a party to this. Later in April, there was a meeting between OPEC and Russia but again it failed to achieve its objective. In June, there was the official OPEC meeting wherein no decision was made other than to follow the market.
John Hall, chairman, Alfa Energy, states that if OPEC wishes to retain any credibility, it will treat the ‘informal meet’ as simply an opportunity to keep in touch with fellow members and other world producers, as it will be futile to attempt to agree to a meaningful outcome on an informal basis when the leading members of OPEC have been producing at record levels – Saudi at 10.67mbpd, Iran at 3.85mbpd and Iraq at 4.6mbpd.
“Fundamentally, a freeze at record high levels would be meaningless anyway as they are the levels that are holding the rebalancing of the market back and therefore the only difference would be if OPEC decided to cut. It is difficult to do it as no one will want to reduce the share they have worked so hard to develop,” says Hall.
“I am sceptical of seeing anything out of OPEC. I don’t see anything out of Saudi,” says Greg Priddy, director of global energy with Eurasia Group.
However, OPEC is optimistic about oil price rise. The recent decline in prices is temporary, OPEC said. “These are more of an outcome resulting from weaker refinery margins, inventory overhang — particularly of product stocks, timing of Brexit and its impact on the financial futures markets, including that of crude oil.”