Kemp: Will OPEC Agree To Freeze Output In Sept?

During previous price slumps, including 1985/86 and 1998/99, there were several unsuccessful attempts before ministers eventually succeeded in forging a significant and successful deal.

Sometimes an extended period of painfully low prices has been needed to soften governments' positions and make them more willing to compromise.

It can take several rounds of failed negotiations for ministers to understand each others' positions properly and identify possible areas for agreement.

In 2016, with the economies of most oil-exporting countries now mired in recession, government finances under strain, and no sign of the expected recovery in prices, the incentives to do a deal are sharper than in 2014/15.

But the obstacles to a successful deal are much the same as before and remain formidable. Saudi Arabia remains unwilling to limit its own production unless other major exporters, notably Iran, Iraq and Russia, do the same.

Saudi officials worry about the verifiability of any agreement given the past history of cheating by other exporting countries.

And there is still the problem of shale production. If OPEC and non-OPEC exporters agree to limit their own production, oil inventories draw down, and prices recover, U.S. shale producers might step in to fill the gap.

Bayesian Forecast

The prospects for reaching a successful deal at the informal energy ministers meeting in Algeria next month remain highly uncertain but provide a good opportunity to apply some Bayesian thinking.

The most successful forecasters start by trying to define a base rate chance of something occurring and then adjust it up or down in the light of evidence about the specific circumstances in a particular case.

They begin with an "outside view" and then proceed to adjust it with an "inside view" based on the specifics of the case ("Superforecasting: the art and science of prediction", Tetlock and Gardner, 2015).

Beginning with the base rate outside view and then adjusting it for the specific inside view does not come naturally to most subject experts including traders, analysts and journalists.

"It's natural to be drawn to the inside view. It's usually concrete and filled with engaging detail we can use to craft a story about what's going on," according to Tetlock and Gardner.

"The outside view is usually abstract, bare, and doesn't lend itself so readily to storytelling. So even smart, accomplished people routinely fail to consider the outside view."

But Bayesian approaches to forecasting have consistently beaten approaches based solely around deep subject expertise.