It seems, as expected, nothing will come from an over-hyped Opec-led oil production freeze meeting in Algiers. Except for providing lots of quotes to fill the airwaves and fuelling oil price volatility, that most would have happily forgone.
I’m not sure how markets developed any optimism whatsoever that an agreement would be made, given the poor track record at meetings so far this year. We now likely have to wait for the official Opec meeting in Vienna at the end of November for something more concrete in terms of concerted efforts to stabilise the global oil market, buoying prices in the face of a global supply glut. However, having everybody (Opec and Russia) in the same room and on the same page is a good start. As is some welcome, even surprise flexibility from the Saudis.
The build-up to today’s finale has been as fun as ever, with plenty of inflammatory and contradictory comment almost making a mockery of the event and the major parties involved. Deals and solutions were allegedly plentiful only to result in little. Iran is the linchpin – stubborn as ever. But rightfully so, in our view, preferring to ramp up production from 3.6m/bpd to its goal of 4m. A distinct lack of urgency on its part to find compromise with struggling Opec peers suggests it is nowhere near as desperate to help stabilise prices. It clearly sees more upside in selling 10 per cent additional production at $46-50/barrel than selling its current output at $50+. How so? After years of sanctions, being able to sell any oil at all is a bonus. And if peers do capitulate and cut production, it will only help Iran in its quest to retake market share. Where’s its incentive to play ball before it gets back to pumping at full pelt? Let the others move first.
This makes sense, with Iran’s public finances far less exposed to the oil industry than Opec mouthpiece Saudi Arabia. The latter was, to nobody’s surprise, the most frustratingly but unproductively vocal this week. It helped the oil price rally with talk of a deal offered to Iran (“if you freeze, we’ll cut”) only for the gains to be swiftly eroded by Iran’s flat refusal. This suggests, even confirms, that the Saudis are in a much more perilous position financially, needing a production freeze/cut deal soon. It’s no surprise, with a skyrocketing budget deficit of $100bn, that it’s mulling a Saudi Aramco IPO and selling government debt to ease the burden of lower oil prices on public spending plans inked when oil was closer to $100/barrel. It is set to meet Russia again next month; prepare for plenty more market-moving rhetoric.
This week’s meeting may not have delivered that much, but will hopefully prove a stepping stone on the way to more stable oil prices. The stream of disagreement between all parties involve, however, remains a wide one to cross. What’s the chance that November’s Opec meeting is yet another damp squib, forcing us to look to 2017 and contemplate déjà vu all over again?
This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.