Chatter in the oil market has been dominated by next week’s meeting in Algiers by OPEC oil ministers, along with Russian officials. The Algiers oil talks will center on hammering out differences in each nation’s stance regarding implementing a global freeze on oil production.
The meeting next week will take place on the sidelines of the International Energy Forum’s global energy conference in Algiers. Contradictory statements from participants are swirling ahead of the meeting, as they have every past effort to reduce the worst oil glut in history,
The Pain Hasn’t Stopped
The situation for oil exporting nations has only grown worse since April’s failed meeting in Doha, Qatar. Forecasts earlier this year that demand would catch up to production this summer have been upended. Estimates of economic growth, especially in China, have been dialed back.
The pain is being compounded as Libya’s civil war subsides and rebel bombings of pipelines in Nigeria nearly cease. This is allowing both nations to increase production to earn desperately-needed cash. Together, they are expected to add 800,000 barrels a day more to the global oil glut. Neither of these countries are going to agree to freeze production until they can increase it back to normal levels.
On top of this, Russia has increased oil production to the highest levels since the heyday of the Soviet Union. Average production so far this month is 390,000 barrels a day more than in August. The Russians, much like the Saudis, couldn’t pump much more crude if they tried. A production freeze wouldn’t affect them at all.
Together, the three nations are pumping an additional 1.19 million barrels of oil a day, putting more pressure on the Algiers oil talks to arrive at a solution.
Oil, Oil, Everywhere
Using the latest figures from OPEC’s Monthly Oil Market Report, global oil demand in August was 94.27 million barrels of oil a day. Global output last month was 95.65 million barrels a day. This means that the global oil glut increased by 1.38 million barrels every day last month. The total increase in global oil oversupply for August was an estimated 42.78 million barrels.
If we take August’s numbers and add the 1.19 million barrels a day of new production in September, the daily global oil oversupply nearly doubles to 2.57 million barrels a day. To put that into perspective, an Olympic-sized swimming pool holds 660,430 gallons. Using the standard 42-gallon oil barrel, that pool will hold roughly 15,725 barrels of oil. This means that the world’s oil producers make 163.43 Olympic swimming pools worth of extra oil every single day. Therefore, it is little surprise that global oil stockpiles total more than 3.1 trillion barrels.
The Blame Game
Once again, Saudi Arabia is conducting a public media campaign to pin the blame on its arch-rival Iran for a failure to reach an agreement. A last-second policy reversal by the Saudis in Doha last April destroyed an agreement on a production freeze. Now,
In another case of “you got your religion in my oil barrels,” major OPEC producers seem to be dividing themselves into sectarian camps ahead of the Algiers oil talks. Champion of Sunni Islam Saudi Arabia has the other Persian Gulf monarchies on its side, while Iran, the major Shiite power in the Middle East, has Iraq and long-time ally Russia in its corner. Caught in the middle are Venezuela, Algeria, Nigeria and other smaller oil producers.
Playing Games Through The Press
Saudi Arabia and Russia are once again jawboning the oil market higher before the Algiers oil talks, by hinting of secret agreements between the two, and a Saudi offer to cut production by 1 million barrels a day, if Iran agrees to freeze its production at its current level of nearly 4 million barrels a day.
In the latest development, Saudi officials declared Friday that the nation “doesn’t expect any decision” to come out of next week’s meeting. This crushed oil prices, upending the optimism some in the oil market were holding on to ahead of the talks.
Skeptics And Believers
Even if the Algiers oil talks succeed in laying a framework for a binding production agreement, skeptics note that there s a large deficit of trust among members. Saudi Arabia in particular got burned badly the last time OPEC agreed on an oil production freeze. They ended up being stabbed in the back by nearly every other member, who increased production while the Saudis cut back. The result was that oil prices didn’t go up, and Saudi Arabia lost market share before resuming full production.
If a miracle happens and an agreement is reached next week, don’t expect oil prices to rise substantially. Shale oil producers in the US will quickly increase production, bringing “Drilled, Uncompleted” (DUC) wells online in as little as a couple of weeks. Also, any agreement that does not include an actual cut in production serves little use aside from PR purposes.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.