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Opinion

 

Nick Cunningham: Is Putin's support
for an OPEC freeze a game changer?


Comments from OPEC and Russian officials over
the past week could signal that a real effort might
be underway to reach a deal on freezing production



In August, when OPEC floated the idea of meeting once again to discuss the possibility of a production freeze, oil prices skyrocketed, ending the bear market that had just formed. WTI and Brent subsequently jumped more than 20 percent in a few weeks, kicking of a bull market.

Still, oil analysts dismissed the meeting as more bluster. After having seen OPEC try and fail to reach an agreement for more than a year, and the dynamics between OPEC members not having appreciably changed from the last time they tried to negotiate, the prospects of a deal seemed slim to nil. And right on cue, after oil prices jumped on the news that OPEC and Russia would meet on the sidelines of an energy conference in Algeria at the end of September, several representatives from OPEC nations seemed to back off from the notion of a freeze. Iraq's oil minister said that Iraq still had much more room to grow production and wouldn't be interested in a deal. Iran stuck to its line that it needed to reach pre-sanctions levels. Saudi Arabia said that market intervention was not necessary. Russia's energy minister also said that a freeze deal was not needed .

However, all parties involved seem to have changed their minds a bit, or at least their tone, since oil prices began falling again in late August. Crude fell back before hitting $50 per barrel, trading back down to the mid-$40s. Oil traders were calling OPEC's bluff, having been burned too many times by rumors that they would seek coordinated action to prop up prices only to see nothing come from the talk.

But the array of comments from OPEC and Russian officials over the past week could signal that a real effort might be underway to reach a deal on freezing production. The Iraqi Prime Minister said his country would support a deal; Iran will attend the meeting; and Saudi Arabia's foreign minister said that his country should sign onto a deal. And on Friday, the potential for an OPEC deal received an endorsement from a surprising source – Russian President Vladimir Putin threw his weight behind a production freeze.

“From the viewpoint of economic sense and logic, then it would be correct to find some sort of compromise,” Putin said in an interview, Bloomberg reported . “I am confident that everyone understands that. We believe that this is the right decision for world energy.” Putin's voice may come as a surprise, but he insists that Russia supported a freeze deal back in April. “Our Saudi partners at the last moment changed their view,” he said. “We didn't reject the idea of freezing output. Our position hasn't changed.”

And crucially, Putin suggested that Iran should be granted a bit of flexibility with the freeze, allowing it to boost output further as it continues to recover from years of international sanctions. “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.”

Putin reportedly also said that he would meet with Saudi Arabia's powerful Deputy Crown Prince Mohammed bin Salman in China at the G20 summit in a few days and recommend that they agree to those terms. He “is a very reliable partner with whom you can reach agreements, and can be certain that those agreements will be honored,” Putin said of the prince.

Of course, as has been pointed out ad nauseam, the freeze deal would do little in addressing the glut of global oil production. Just about all the participants in the potential freeze are producing at their limits, with several of them having ratcheted up production this year. Capping output at record levels does very little to restrain output. Nobody is actually considering a cut.

Yet, oil prices will move anyway. Just as OPEC managed to spark an oil price rally in February when they floated the idea of freeze negotiations to be held Doha, OPEC could be interested in talking up another price rally. After all, discussion of the Algeria meeting sparked a 20 percent rally in crude prices last month. OPEC might see the upside of agreeing to a deal, even if (or especially if), it has no teeth. The psychological impact on the oil markets could lead to further price increases while not actually requiring any sacrifice.

All participants seem to be coming around to that idea, which suggests that the chances of a successful agreement are not as much of a longshot as many oil analysts thought just a few weeks ago.

By Nick Cunningham of Oilprice.com



Nick Cunningham is a Vermont-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by oil price.com , 09/02/2016. Petroleumworld reprint this article in the interest of our readers.

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