Is Opec just talking up the market again?
A deal is likelier now than it was before, but hurdles remain
Opec sent oil markets into a flutter in mid-August when it announced yet another informal meeting, which could result in a group-wide deal to freeze oil output.
The group will meet in Algiers in late September, on the sidelines of the International Energy Forum, to discuss whether a coordinated freeze, or even cut, could be agreed across the producing group. Alexander Novak, Russia's energy minister, also suggested that the country might join the negotiating table in Algeria.
Brent prices immediately strengthened, even breaching $50/b on 18 August for the first time since the beginning of July.
Mohammed Bin Saleh al-Sada, Qatar's oil minister and Opec president, released a statement confidently asserting that "the current bear market is only temporary". He added that crude prices will rise by the end of the year as global supply tightens.
Khalid al-Falih, Saudi Arabia's energy minister, followed up, saying that the Kingdom would take "any possible action that might be required to stabilise the market".
While these statements are remarkably similar to ones made ahead of the failed Doha talks in April there are fundamental differences now that could improve the chances of reaching a deal.
One crucial change since Doha is that the world's largest crude exporter has a new oil minister. Ali al-Naimi was dismissed after the Doha debacle. So if the kingdom is to change policy now, it can lay the blame on the earlier one at Naimi's door.
The diplomatic skills of Falih have been noted. But that hasn't prevented an impression that Saudi Arabia is still sending out mixed messages.
Falih claimed in August that even though the fundamentals are weak, market rebalancing "is already taking place". If so, why start talking up the chances of supply-side coordination?
One answer is that Falih is misreading the runes about supply and demand converging. Certainly, Opec's view for the past year has been that the rebalancing would be visible in the second half of this year. It isn't. Despite large upstream capital spending cuts, global oil supply has increased significantly while demand growth is slowing.
Opec's output reached an eight-year high in July as Saudi Arabia pumped out a record 10.62m barrels a day. Burning crude to power air conditioners isn't just to blame for the surge. The Kingdom's crude exports were 7.46m barrels per day in June, according to figures released by the Joint Oil Data Initiative (Jodi). While this is around 375,000 b/d lower than exports in January, volumes are significantly higher than last year.
Saudi Arabia's total crude exports over the first half of this year were 45.12m barrels, according to Jodi. This is the highest since the same period in 2012 and is 365,000 b/d more than in the first half of last year.
Increases from Kuwait and the UAE also helped to push up Opec's output, which is now 0.68m b/d higher than a year earlier. Nor is Russia's output showing any signs of slowing down: production in June and July was 10.85m b/d in June and July, 190,000 b/d more than a year earlier. More oil is due on stream too.
But the biggest gains so far this year have come from post-sanctions Iran and Iraq, which have added around 0.56m b/d and 0.5m b/d, respectively. These increases have more than offset year-on-year losses of around 150,000 b/d from both Venezuela and Nigeria.
Iran proved a major stumbling block to the success of talks in Doha when it refused to take part - and remains an obstacle to an agreement in September. It has steadily increased production since January. In July, its output reached 3.6m b/d - but Tehran wants more, targeting 4m b/d as soon as possible, or roughly its level before sanctions.
Tehran says it will only discuss a freeze when exports have reached 2.5m b/d. That implies another 400,000 b/d of foreign sales, in a market suddenly worrying about weakening demand growth.
Global consumption rose by 1.4m b/d in Q2, says the International Energy Agency, down from 1.6m in Q1. But in Q3, the rise will be just 1.2m b/d. The agency has also lowered its forecast for global oil demand growth next year by 100,000 b/d, to 1.2m b/d.
So a deal might, once again, hinge on Iran's intent, Saudi Arabia's patience with Iran, and the market's reaction to the mixed signals. Talking up the market, instead of intervening, has some benefits, even if they are short-lived.
BNP Paribas noted recently that if the $4-a-barrel rise in Brent crude prices that followed the announcement of the Algiers meeting were to last through September, it would boost Opec revenue by more than $4bn.