An Oil Freeze? So What?
The oil business was abuzz last week with the rumors of a possible agreement between Russia and Saudi on freezing their production at their present levels. Consequently, prices began to creep upwards, especially after both the Saudi and Russian oil ministers made optimistic noises during the recent G20 meeting. They said that a semi-permanent committee would be established to seek ways of cooperation on oil and indicated indirectly that some sort of freeze would be “good”, and “maybe” likely. That was sufficient to trigger oil traders and turn them bullish – for a while at least before they came back to their senses.
Price Rally? It is a lot easier said, than done. Quite a few hurdles remain before oil prices can take off. The least of these hurdles is Iran’s insistence on continuing to increase output, until it reaches its pre-sanction levels.
The problem is that both Saudi and Russia are producing at close to their peak capacities, which jointly represents approx. 20-25% of total world output – Hence, they would not be making any big sacrifices by freezing their short term output levels.
At the same time, today’s total world oil production is still above demand, which means there is no chance of a sustained price rally until the fundamentals sort themselves out i.e. Demand increases above Supply – Which is expected, or rather hoped for, by mid/end 2017.
But also, that is when the other oil producers are likely to revolt and break their chains. They will grab any opportunity of demand growth to jack up their production to relieve their dire economic conditions. Does this mean that another price war is in the books? Will oil prices remain low for a long time?
OPEC was, more or less, an effective production regulator. But its spirit has been destroyed, and only its corpse remains as a Zombie. It can no longer act as an impartial unifying organization among the producers – its credibility has been drowned by waves of crude oil.
Does this mean the possibility of a new cartel emerging, without Saudi and possibly the Gulf producers? Would such a cartel include Russia and Iran? These are interesting scenarios that could certainly turn upside down the long prevailing oil market structure.