On Sunday some of the largest global oil producers will meet in Doha to try and reach an agreement on production levels. The very fact that this meeting is taking place has been enough to drive up prices.
WTI crude and Brent crude bottomed out in February when the oil producers began to discuss introducing a plan to freeze oil production at January’s levels, even though these levels are some of the highest yet within the industry.
In response WTI advanced from US$26.21 all the way to US$42.25, a rise of 62.19 per cent in just over a month. Brent also advanced from $27.88 all the way to as high as $44.81 within two months, up 65.35 per cent.
The power of “expectation” is very clear. The recent recovery in price has been based on hopes and remarks, but at this stage no hard facts or agreements.
For the past few weeks, almost every day we have had different views or updates from commentators and producers alike, raising speculation about and hopes of a production freeze. But after Sunday, hopefully the picture will be clearer.
The dynamics of supply are always changing and at the start of the year, after sanctions were lifted, no one expected Iran would be able to produce a significant amount of oil. Even Iran noted that they were aiming to reach 1 million barrels per day by June. However, Iran has surprised the world with 3.2 million bpd in March. This has immediately led to producers calling for Iran to be included in any supply formula.
Last week, Saudi Arabia announced that it is ready to freeze production only if Iran agrees to join. However, Iran responded by saying “we will attend the meeting but without joining the freeze plan”. This caused an immediate drop in price, reaffirming how sensitive oil is to news.
On Tuesday, oil spiked by more than 5 per cent on reports that Saudi Arabia and Russia had reached a consensus on an oil freeze and that the Doha meeting decision will not depend on Iran. There is still no confirmation of the remarks, and the Saudi and Russian ministries have not commented on the reports. But some analysts see this rhetoric as paving the way for a deal in Doha.
There are a number of scenarios from the meeting which can be considered. The first is that there is no freeze. This may be possible, as many analysts and industry insiders believe that Iran is now important to this meeting, and if they refuse to join in then the others will back away from an agreement.
There could be an outcome whereby there is no freeze, but the parties continue to monitor production and will act if the price does not keep increasing, or falls below the $35 to $40 per barrel level.
This would buy the producers more time ahead of the next Opec meeting in June. Or, in order not to disappoint the market and to keep hopes higher, the producers may reassure the market that a deal will be reached at some point in the coming weeks ahead of the Opec meeting.
The other option is for a freeze to be agreed for one or a number of months to allow the price of oil to establish its true value.
If Iran does refuse to be part of the deal, the other producers may be more inclined to go for the short-term freeze option and monitor what happens. This may be acceptable to the market.
Any freeze in production would maintain the positive momentum towards oil, but this does not mean that $100 per barrel will be reached this year.
Whatever happens, the most important fact is that the producers are meeting and talking. This will give the markets the reassurance they are looking for and as we have seen, any good news helps to lift the price.
Almost all producers and users agree that oil is undervalued at the moment, and controlling supply is the best way of resolving this.
The positive export figures from China yesterday also indicate that the economy may be stronger than many people believe, which is also good news for the industry.
Nour Eldeen Al Hammoury is the chief market strategist at ADS Securities