OPEC Output Freezes Update

While I was gone visiting our supply chain, we received quite a bit of news that may give us some indication on the probability of OPEC agreeing to freeze production at their much anticipated informal meeting in Algeria on September 26-28, 2016.

As we all recall with gut-wrenching pain, OPEC made the surprise decision in November 2014 to allow oil prices to tumble by refusing to curtail production. You may also recall that in our August 19, 2016 edition of The Five Star Standard, we discussed in-depth our current thoughts on the probability of an output freeze and those factors weighing both for and against. (See OPEC Flirts with Production Freeze). And again in our August 26, 2016 Edition (See OPEC Production Freeze? Don’t Get Your Hopes Up). Obviously, the price of oil could see a dramatic impact should OPEC members agree to a production freeze, and an even more dramatic impact if they actually adhere to any agreement (which is at best a dubious proposition). Obviously, as previously discussed there are many incentives for OPEC producers to at last freeze production (Saudi Aramco IPO will boast the value if oil prices are higher, Saudi and other OPEC members are quickly burning through their reserves and running deficits, etc), and many factors weighing against a change in current OPEC policy.

So it should not come as a great surprise to anyone that these topics dominated the news cycle over the past several weeks while I was away. Here is the recap of the latest information we received over the past few weeks, and how it might impact the probability of a freeze. Note that we often get quite a bit of contrary information, often from the same players.

In an article published Reuters, we got an interesting look from confidential sources about what happened at the last meeting, and what might occur in the future. Below are some key points:

• At least one source inside OPEC stated that the Saudis are going to Algeria looking for a freeze and that more and more ministers are talking among themselves about their production position.
• While OPEC refused to reach an agreement in December of 2015, the new Saudi energy minister Khalid Al-Falih has seemed to shift, arguing the world needs $50 per barrel oil to achieve market balance, although he has also given some indication he does not believe intervention is necessary.
• There is some indication that Saudi Arabia, at least behind the scenes, is working towards intervention, rather than letting market prices prevail. At OPEC's last meeting in June, held in Vienna, Al-Falih allegedly surprised some of his counterparts by proposing OPEC set a new output ceiling, according to several people familiar with the matter. This is in contrast to the Doha meeting in April (a non-scheduled meeting) where an output freeze agreement feel apart because of Saudi Arabia’s unwillingness to allow Iran to return to pre-sanction levels of output In addition, sources alleged the Saudi minister met with the Nigerian minister to discuss a ceiling of 32 million barrels per day with flexibility towards Iran. This would mark a major shift.

Iran’s good friend Russia seems to be working on their behalf to advocate for exempting them from a production freeze. We previously noted that Russia was willing (if not eager given the collapse in their economy as a result of low prices) to agree to a production freeze. During in interview with Bloomberg, Vlladimir Putin indicated he would like OPEC and Russia (which collectively produces around half the world’s oil) to agree to a freeze and that Iran’s participation can be resolved. “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.”

I believe this makes sense for Putin to advocate on behalf of Iran. In terms of general world alliances, you have Saudi Arabia/U.S. on one side and Iran/Russia on the other. In fact, in February of this year, Tehran announced its intention to spend $8 billion on Russian-made arms. Of course Russia wants Iran to have money!

While I further believe that any real action from OPEC is unlikely prior to the U.S. Presidential election, there is some incentive for the Saudis to be more willing to support additional Iranian production if Russia will make some concessions as well. So, while I do view the announcement on September 05, 2016, by Saudi Arabia and Russia that they will set up a joint task force on oil pricing as positive, I do not know if its more show than substance. However, having these two collaborate (given how they line up against each other on a more global posture) may be a very positive indication that something could actually get done.

In addition, Iran has finally signaled (notably they are now at near pre-sanction output levels) that they are willing to deal. On September 6, 2016, Iranian Oil Minister Bijan Zanganeh met OPEC Secretary-General Mohammed Barkindo in Tehran and said he would support any measure to stabilize crude prices at around $50-60 per barrel. But Iran then turns around on September 7, 2016, through a different surrogate, and says its too early to discuss an output freeze in Algeria and $40-$50 a barrel oil is “reasonable” and the market is “stable”.

And while all of this may indicate to you we should be rejoicing that a freeze is imminent, I urge you to consider the contrary view presented in the various editions of The Five Star Standard, and this excellent article by Clyde Russell published by Reuters.

Again, I urge you to read this week’s Ty’s Take to see what we believe will happen.

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_TY

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