OPEC still matters

August 9, 2016 08:17 AM
Daily Energy Market Analysis

Qatar's energy minister, Mohammed bin Saleh al Sada and the president of the Organization of the Petroleum Exporting Countries (OPEC), confirmed that OPEC will have an informal meeting Sept. 26-28 at the International Energy Forum in Algeria. Russia said that while there was no need for a freeze, they would be willing to listen. There are some that are laughing off the possibility of a production freeze because of the failure at Doha in April, but one must not just dismiss it. A deal at Doha was closer than anyone imagined and there is a possibility that they can put those pieces back together. 

While some people try to say OPEC is not a factor in the global market, it should be clear that they still have a significant influence on prices as they pump 40% of the global supply and 60% of the oil traded internationally on a daily basis. Just ask shale producers across this country whether they think OPEC matters as its production war drove many of them out of business and forced U.S. oil production to fall by close to a million barrels a day. To understand the odds of freeze deal getting done, you have to understand why the Doha deal fell apart. 

As OPEC members went to Doha, it was to be a historic event. After months of negotiations, Saudi Arabia’s powerful oil minister, Ali Al Naimi, the face of the OPEC cartel, cut a deal with Russian Energy Minister Alexander Novak to agree to a freeze output. There was an understanding that they could do the deal without Iran because they both knew that after years of sanctions the Iranians were going to want to regain some of the barrels they had lost. So there was an agreement to allow Iran some slack and it was off to Doha to sign the deal.  

Of course, in the old days whatever Ali Naimi wanted when it came to Saudi oil policy, he got. For all intents and purposes they had been the global oil market for the last 30 years. Yet there was a new King in Saudi Arabia and a new 30-year-old Saudi royal Deputy Crown Prince Mohammed bin Salman who had other ideas. Because of tensions with fighting proxy wars between Yemen, Syria and Iraq, tensions had been running high. The Prince could not separate the two and when Iran’s oil minister failed to show in Doha, the Prince blew a fuse and killed the deal. This outraged Alexander Novak that said he came to sign an agreement not to debate one. 

In the aftermath the Prince and Saudi Arabia took a hit diplomatically. The new Prince could not be trusted. He then fired Ali Naimi and replaced him with Khalid-al Falih, the chairman of the country’s state oil company, Saudi Aramco. 

Now it seems Prince bin Salman, the power broker and Khalid-al Falih want to restore their credibility, which means they will probably work together. They will try to bring Russia back into the fold and the big sticking point of oil from Iran may not be as big of a deal as their production is getting close to pre-sanction levels. MarketWatch reports that Iran’s production has crept back up to 3.6 million barrels a day, almost 600,000 barrels a day higher since world powers lifted economic restrictions over the country’s nuclear program in January. That brings production to within reach of 4.0 million - 4.2 million barrels a day that Iranian officials said they would require before agreeing to a freeze.

Crude oil did dip on the Genscape number that showed supply in Cushing, Okla., rose by 307,000 barrels. Natural gas pulled back but is that the final story! My natural gas webinar is today!

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.