What Does OPEC's Freeze Talk Really Mean?

Heading into the home stretch before a highly anticipated OPEC meeting in Algiers next week, crude industry experts and non-OPEC members alike are opining on what may happen to crude production.

Dave Pursell, managing director and head of macro research at Tudor, Pickering, Holt & Co. in Houston, told Rigzone the production freeze idea is based largely on optics.

Dave Pursell
Dave Purcell, Managing Director and Head of Macro Research, Tudor, Pickering, Holt & Co.
Managing Director and Head of Macro Research, Tudor, Pickering, Holt & Co.

“But, they’re raising expectations that there will be an agreement,” he said. “I think they need to do something, and the challenges are less now than they were earlier this year.”

Oil prices have tumbled from more than $100 per barrel in 2014, as prodigious supply outsized demand. More recently, crude prices have hovered in the low $40s.

As Pursell explained, OPEC members Iraq and Libya can’t produce more oil, anyway, at least in the near term. Iraq needs significant capital investment to move forward, and Libyan production is struggling under the weight of political unrest.

“The reality is the only reason you can get a freeze is because people can’t grow. The only spare capacity in the world sits inside of Saudi Arabia and Libya. That doesn’t mean Iran and Iraq can’t grow over time, and the rest of OPEC can’t grow a little bit over time, but it takes a ton of capital,” he said. “There’s no spare capacity that could easily be brought on.”

Still, Pursell said that even if a production freeze agreement is mostly for show, it’s not meaningless.

“But it’s important ‘show’ in that shows they can agree to something. There’s this notion that OPEC is irrelevant and my argument is that if OPEC is irrelevant, how come I’m talking about them every day? And so if they’re going to eventually have to cut – which we don’t think they will – but if they do, you first have to have an agreement to not increase,” he said. “You have to agree on something, and then if you have to make a harder choice down the road that you have to cut, there’s more confidence that it could actually be implemented.”

Many analysts, including Pursell, have said a cut is unlikely, though. Russia recently said it’s off the table. The nation’s energy minister told UPI there are no proposals to slash crude production. Alexander Novak said one option under review would be to maintain production rates at current levels for the up to six months.

According to a new Reuters’ story anonymous sources have said Saudi Arabia would be willing to cut its crude production if Iran will cap its oil output. Iran has steadfastly said it won’t consider a freeze until it has ramped production back up to pre-sanction levels, but that may soon happen.

An award-winning journalist, Deon has reported on energy, business and politics for almost 20 years. Email Deon at deon.daugherty@rigzone.com

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