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In the build up to the informal OPEC meeting in Algeria this week, markets made a substantial ado about the likelihood of an agreement to freeze production. We even published multiple columns over several weeks on what OPEC might do and why. We presented the facts and information supporting the possibility of an agreement to freeze and the impediments to it. And I consistently expressed my cynical side when discussing the likelihood of a freeze.
I might have called it wrong. In fact, to be perfectly honest, I was so wrong that I spent the better part of Wednesday morning writing what would have been a great column on the lead up to the meeting, what we knew, why it failed and what we learned. Scratch that hard work…
But my first word of caution: this was an informal meeting. Nothing actually will happen until November.
Nevertheless, leading up to the actual informal meeting, there was a lot of data supporting our position.
In fact, Reuters reported Tuesday that a freeze seemed impossible. "This is a consultative meeting," Saudi Energy Minister Khalid al-Falih told reporters. Iranian Oil Minister Bijan Zanganeh said: "It is not the time for decision-making." Referring to the next formal OPEC meeting in Vienna on Nov. 30, he added: "We will try to reach agreement for November." This is Tuesday before the Wednesday agreement! Now, as a lawyer I’m infinitely familiar that parties engage in posturing to get what they want. Yet, everyone seemed to be on the same track: no freeze – let’s talk about it in November.
But now, by some weird twist later afternoon Wednesday, we get the announcement that OPEC has agreed, in principal, to a production freeze. The Organization agreed to limit its production to a range of 32.5-33.0 million barrels per day (bpd). OPEC estimates its current output at 33.24 million bpd. On its face, this is approximately a 700,000 bpd decrease.
Allegedly, under the terms of the Agreement, Saudi Arabia, the world's top producer, is expected to cut output by 350,000 barrels a day, It is also reported (but without citation to any person) that three countries are exempted from the production cuts: Iran, Nigeria and Libya. Economic sanctions were lifted on Iran earlier this year, and Libya and Nigeria have had some of their oil facilities damaged by terrorist attacks in recent months. Read more. I go back to Wow. I mean Wow!!!!
Historically, What Happened Proceeding the Meeting?
We first noted in our column OPEC Flirts With Production Freeze that rumors were circulating that OPEC would use the energy conference in Algiers to hold an informal meeting to discuss a production freeze. This all started off one statement: when Saudi Energy Minister Khalid Al-Falih stated “We are, in Saudi Arabia, watching the market closely, and if there is a need to take any action to help the market rebalance, then we would, of course, in cooperation with OPEC and major non-OPEC exporters.”
Not wanting to be left behind, and perhaps wanting to further the rumor to temporarily boost prices, Russia quickly confirmed they were willing to consider a production freeze. And markets did, in fact, rejoice. In short order, crude jumped 15% on mere speculation a freeze could occur. At the time, I noted my take of the extreme improbability of a freeze. But hey, we are a month out, let’s see what happens.
But then, we begin to see cracks in the whole scheme. Iraq announces they will add 150,000 bpd from fields they control and simultaneously asked foreign producers operating in Iraq to increase. Oh, and then there is Iran. Iran’s oil minister states: no Saudi Arabia – we will not agree to any freeze that freezes us below pre-sanction levels. See OPEC Production Freeze? Don’t Get Your Hopes Up.
Testing out his new ability to be the peace-maker of the Middle East (please read this statement as dripping with sarcasm as it is), Vladmir Putin steps in on behalf of his buddy Iran and says, “Iran is starting from a very low position, connected with the well-known sanctions in relation to this country,” Putin said. “It would be unfair to leave it on this sanctioned level.” See OPEC Output Freeze Update, What I speculate he might have been doing is sending a message to Saudi Arabia: look give Iran some leeway and we will maybe help some. Or maybe not. I’m just guessing.
To add to the confusion, as we noted in the above article, on September 6, 2016, Iranian Oil Minister Bijan Zanganeh met OPEC Secretary-General Mohammed Barkindo in Tehran and said he would support any measure to stabilize crude prices at around $50-60 per barrel. But Iran then turns around on September 7, 2016, through a different surrogate, and says it is too early to discuss anoutput freeze in Algeria and $40-$50 a barrel oil is “reasonable” and the market is “stable”.
And, leading up to the meeting, some suggested the “informal” meeting be changed to a formal meeting. The difference is significant: at an informal meeting, the ministers do not have actual authority to enter into agreements. Essentially, they can agree to agree at a later formal meeting. But at a formal meeting, they can make changes. This movement never gained traction – perhaps to avoid
I don’t know about you, but my head is spinning. And this is just a summary of all that was done and said.
Some Words of Caution
I discuss what I think the potential OPEC Production Freeze means in this weeks Ty’s Take and what effect a freeze will actually have assuming it actually happens.