Russell: Will It matter? That's The Question To Ask Of Any Producers' Deal

Reuters

The opinions expressed here are those of the author, a columnist for Reuters.

LAUNCESTON, Australia, Aug 18 (Reuters) - Asking whether the world's major crude oil-exporting countries can reach a deal to limit output is probably the wrong question. Asking whether it matters if they do is more relevant.

Once again the speculative "will they, won't they" merry-go-round has been fired up ahead of a planned meeting of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers.

As in the run-up to previous meetings, investors and traders will hang on every twist and turn in the words of oil ministers in the six weeks between now and the meeting at a forum in Algeria on Sept. 26-28, trying to work out if a deal is likely.

While this is interesting and will keep the media and analysts occupied, it's likely only to exert short-term influences on oil prices and increase volatility.

It's a more pertinent exercise to ask what will happen if the producers do manage to reach a deal, having failed in their previous six attempts.

There is certainly increased motivation for a deal to be reached, as the ongoing weakness in oil prices is causing rising fiscal pain for many producers. Some, such as Venezuela are teetering on the brink of social collapse, and others are eating through monetary reserves.

Still, given the inherent tensions between even fellow OPEC members such as Saudi Arabia and Iran, and the disparate nature of a group that includes outsiders as well, achieving a workable consensus in Algeria will be a challenge.

The price of global market Brent crude has jumped 20 percent since hitting a four-month low on Aug. 2 to close near $50 a barrel on Wednesday, reflecting some optimism the producers will be able to agree on limiting output.

The price is still below the peak so far this year of $52.86 on June 9, and is less than half of what it was in June 2014, when the last big downturn started.

However, assuming that some sort of agreement is reached in Algeria, what becomes important is the nature of the deal.

The consensus view is that any agreement would likely be a weak pact that did little to alter the supply-demand balance in the short to medium term, but that may tighten the market from late 2017 onwards on the basis that supply would remain flat while demand eventually rises.

Any agreement that allows major oil producers to continue pumping at current rates - near records for some - will merely serve to confirm that supply will remain robust.

Middle East Producers Pumping Merrily

The top producers in the Middle East have all been ramping up output recently, with industry sources quoted by Reuters saying number one exporter Saudi Arabia may pump record volumes in August.


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