By April Iran was staunchly opposed to cooperate. This unexpected turnaround caused the price of WTI crude oil to rise sharply on Tuesday – within a matter of seconds – from 46.60 USD/bbl to over 48.20 USD/bbl.
What options does OPEC have?
The reason Iran has changed its opinion is that the production target of around 4‘000 million barrels a day (bpd) is within reach. Since the international sanctions were lifted in February, Iran was able to increase its output level from 2‘800 mbpd to 3‘550 mbpd, which is close to its pre-sanctions level. In addition, the Venezuelan oil minister managed to mediate between Iran and Saudi Arabia reducing political tensions. This will pave the way for OPEC to discuss possible measures to stabilize the oil prices at the international Energy Forum in Algeria in September. But what are the possible options for OPEC? The most effective way to boost the oil price would be to reduce the production levels. This is currently not a realistic option, since both Iran and Saudi Arabia depend on the revenues to compensate their budgetary deficits. The other option would be to freeze the current levels of production. Russia has already indicated its willingness to cooperate if an agreement within OPEC is reached. However, it can be assumed that Iran will insist on reaching the target production level of 4‘000 mbdp, what, in turn, would not be accepted by Saudi Arabia. However, even if an agreement can be reached it is important to take into account that Nigeria and also Libya would raise the production rates back to a normal level once the national crisis are overcome.
US producers are increasing the output again
Additionally, it is important to note that the output in the US has decreased by 1’000 mbpd since the production levels peaked mid-2015. However, a further price recovery in crude oil would boost the US output. Since the price climbed from 40 USD/bbl to 50 USD/bbl in August the production volume already increased by 140 mbpd.
The supply side does not seem to me to be able to trigger a sustainable crude oil price recovery at the moment. A possible agreement between the OPEC members and, most importantly, complying with it seems to me a very complex process indeed. Moreover, any crude oil price recovery will be held back by increasing production volumes by US producers.
Conclusion: A solid increase in demand is necessary
The oil price can only increase on a sustainable basis, if we see a major boost on the demand side. But this appears more than questionable considering the overall global economic situation. We will probably need to get used to prices in a trading range between 40 and 50 USD/bbl with a cap at 60 USD/bbl at the highest level. However, increased short-term volatility should be expected ahead of the forthcoming energy summit.