At a meeting in Algiers on Wednesday, OPEC's members agreed they need to cut crude output to offset a supply glut amidst a flattening demand environment. The announcement sent prices soaring, despite several uncertainties regarding the ultimate, actual finalization of the current "agreement," slated to become formalized at OPEC's November meeting. Among these uncertainties include 1) the Iranian oil minister's assertion earlier in the day, when speaking to Bloomberg reporters, where he indicated Iran had no intentions of a freeze, let alone a production cut. In the interview, Bloomberg reporters specifically asked whether it remained the intention of the Iranian Oil Ministry to continue toward its production target of 4mm barrels/day. The oil minister responded "Yes, that is our intention."

It's no surprise the Saudis are now indicating they have become more open to discussions around a potential freeze, notably after the Kingdom's plan to gain market share in Asia and other global economies by operating full-out with the hopes of putting its shale counterparts out of business has clearly backfired. Now, the Saudi government is really struggling, and was just forced to slash government salaries by 20% across the board, while also making significant cuts to the government subsidies the Saudi population has become so accustomed to as part of their daily lives. Today, the Saudis are running a 16% deficit against annual GDP, an unsustainable situation should oil prices stay range-bound (between the $31-$50), as we've seen since April.

While the Saudis were all for it, the outcome in Algiers came as a bit of a surprise, particularly after the Iranian Oil Minister indicated without hesitation they would not consider a freeze, and that they were continuing to push to their 4mm barrel/day output targets.

Of course, considering its serious budgetary constraints and deteriorating fiscal climate, the Saudis gave the strongest indication yet that it's ready to compromise with long-time geopolitical rival Iran.

News reports, including Bloomberg and the like, are citing the news "may pave the way for the first limit on oil production in years." I hardly think so.

Haven't we seen this phenomenon in the past? Cartels don't work -- everybody cheats. I am dubious regarding any real production cuts coming out of November's meeting for several reasons, most notably Iran's clear statement yesterday that it would not be freezing, rather it would continue to do the opposite, pursuing its goal of 4mm barrels/day in total output. As a result, in my view Iran either 1) won't agree to the deal, if a cut is presented in November, or 2) will agree to a deal but then squander its fellow OPEC members by continuing to run full-out, irrespective of OPEC agreements. Other OPEC members will produce beyond their respective allotments as well.

We've seen this in the past, it is nothing new -- cartels, generally speaking, do not work. Members of a 'cartel' have a natural incentive and tendency to cheat, not only to get a lead against the competition but also to protect themselves from other cheating cartel members. The rapid collapse in potash prices seen in 2012 is a fine example of the failure of "cartels" to succeed for any sustained period of time. This was accomplished through the coordination of producers in the two largest potash-producing regions of the world, namely Canada and Russia/Belarus. In Canada, you had one 'cartel' comprised of Mosaic Corp., the Potash Corp of Saskatchewan, and Agrium, Inc (collectively referred to as the "Canpotex" cartel). Likwise, in Eastern Europe you had the other two potash majors working together to keep output low, namely the Russians and the Belarusians.

While this global price coordination may have worked for some time, it would eventually fail as one (or more than one) party to a cartel, who had agreed upon maximum output levels, was accused of cheating. In Potash's particular case, the Russians accused their partners in Belarus of selling outside their agreement, undercutting prices and selling beyond their allotment into Asia. As one might expect, the Russians acted quickly and in a similar manner, announcing to the global market it would switch from a "profit maximization" strategy (i.e. one in which supply is controlled such that profits can be earned) to a "revenue maximization strategy," which would entail production at all capacities, running full out, sending global potash prices on a free fall. With pricing so cheap from Eastern Europe, the Russian/Belarusian counterparts in North America had no choice but to slow production rates while attempting to maintain the majority of their capital intensive production assets. Eventually, mine closures were announced one after the other, and the entire "stable" potash price dynamic has not been the same since. Since, supposedly, Belarus cheated, it in turn pointed at the Russians as the cheaters. As with any similar story, it doesn't end well. BPC, or the 'cartel' formed in Eastern Europe between Russia and Belarus, and "Canpotex," the 'cartel' of North American producers, eventually fall apart. One key, fundamental reason the cartel strategy generally won't work is the paranoi among each member that its neighbor will cheat, leaving it in the dust. So what does this mean? Typically, they all cheat eventually, generally sooner than later.

Simply put, oil/crude prices are a function of supply and demand dynamics. Today, we have a large supply glut, and relatively weak demand. Demand, however, should pick up in the coming years, which could ultimately help crude move beyond its current, range-bound status.

Don't concern yourself with the intermediate term noise, driven by theatrical meetings between Iran and Saudi Arabia, with zero regard to either country's capacity to continue to produce at existing rates while sustaining government spend.

After a long day of bilateral meetings in which Russia played the role of mediator between Riyadh and Tehran, Al-Falih noted "opinions are getting very, very close together." I would take this lightly (approach with caution), considering that still, Iran and Saudia Arabia face significant hurdles as both nations have yet to agree on their respective new production targets.

The two countries started the meeting seeking to close a gap of 600,000 barrels a day between their respective positions. The difference, more than fellow OPEC member Ecuador's total daily production, shows that much work remains before the group can replace the pump-at-will policy adopted in 2014, which drove an upending the oil markets, shaking investors, corporations and entire economies. The stakes remain high as the EIA projects a worsening oil market if supply dynamics do not change. Nothing in November will be sufficient to adjust the supply dynamic in any meaningful way. Accordingly, I anticipate range-bound prices sub-$45 for the most part for the next 6 months or so. Don't be fooled by today's momentum.

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