EC Another Oil Freeze Fiasco?

The usual OPEC suspects – Venezuela, Ecuador, and Kuwait – are pushing for a revival of the oil freeze talks that took place last April in Doha, Qatar. As usual, any time someone in OPEC says anything about freezing production, hungry speculators push up the price of oil. They did the same on Monday.

Savvy investors, however, should be wary of such news. Market watchers saw a similar situation unfold earlier this year. This past winter, when news first emerged that OPEC and non-OPEC members might discuss a production freeze, the price of oil was at its lowest – $28 a barrel. By the time the talks took place months later, oil had rallied almost 50% to over $44 a barrel. This was largely based on speculation. After the talks fell apart, oil promptly fell 7%. This time around, investors should approach news of oil production freeze talks with great skepticism. Do not buy into the idea that financial conditions, fundamentals, or even political policy goals have changed simply because an OPEC minister suggests oil production freeze talks.

At first, it seemed like the oil market had learned its lesson and was not taking this news seriously. When news broke on Friday, the price of oil fell most of the day before ending up nearly unchanged. This week, however, speculators seem buoyed (oil rose 2.5% on Monday) by the idea that OPEC members might agree on a production freeze when they next meet in Algeria on September 28, at the International Energy Forum.

Why the Doha Oil Freeze Failed

Last time around, the news media reported that tensions between Iran and Saudi Arabia ruined the deal at the last minute. According to that narrative, the deal was ready to be signed without Iranian participation, but Saudi Arabia supposedly scuttled it at the eleventh hour when it suddenly changed its mind and decided that Iran had to agree. This inaccurate narrative fed speculation that resulted in the 7% price drop.

In reality, the Doha talks failed because none of the major oil producing countries (Saudi Arabia, Russia, Iran, and Iraq) had any real incentive to agree to cap their production. From the start, Ali al-Naimi, then Saudi Arabia’s oil minister, made clear that all OPEC nations (including Iran) had to participate for the production freeze to even have a chance. He was willing to participate in the talks without Iran, in hopes that Iran might be convinced to join in, but he made it clear from the start that no production freeze could be successful without Iran’s participation. Bijan Zangeneh, Iran’s oil minister, also made it clear from that start that Iran would not even consider participating in an oil production freeze before the country’s oil production reached pre-sanctions levels. The Doha talks never had a chance.

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Chee Hin Teh 5 years ago Member's comment

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