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Will Saudi drive a crude output freeze?

With the oil producers meeting three weeks away, the comments emanating from three key players provide us with a good idea of whether we could see action to prop up crude prices.

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With under three weeks until the crucial oil producers meeting, markets are attempting to decipher comments from numerous major actors with a view to understanding where we stand in relation to a potential production freeze. The ability to support market prices comes off the back of actions rather than words, yet words of course allow us to gain a better idea of whether the meeting may eventually provide us with the crude price rise many are anticipating. Given the heightened expectations, we are likely to see significant volatility in either case and with that in mind, it is worth taking a look at the major players to see where they stand.

Saudi Arabia - Leading figure in OPEC, instigator of current oil price crisis and ultimately the bottom line for any action

Monday’s G20 meeting saw Saudi and Russian representatives announce a strategic partnership to help ‘stabilise prices and ensure steady investment in the industry’. While sparking a circa 4% rise in crude, the follow up comments were telling. The Saudi oil minister noted ‘there is no need now to freeze production ... We have time to take this kind of decision.’ He added, ‘freezing production… does not have to happen specifically today.’

Verdict: Seems more interested in you believing it will act than actually taking action. Its willingness to act will likely come down to the actions of Iran and, to a degree, the US. The US has seen production fall 11% in the past 14 months, which when compared with the incessant rise in Saudi production, leaves some leeway from a market share perspective.

Russia - Non-OPEC member with the third-highest crude production

Russian Energy Minister Alexander Novak’s statement that a production freeze would be one way to stabilise prices highlights the fact it is looking at different options.

Verdict: Alongside Saudi, the Russians want to be seen to take a stand to maintain prices. Unlike Saudi Arabia, Russia seems to care more about getting a good price for its oil than any political consideration. Its comment that Iran should be able to continue raising production until it hits its pre-sanction level says as much. With the Russian economy highly reliant upon energy exports in the face of European sanctions, its participation in this Saudi-Russian working group seems to be genuine.

Iran - Smaller scale player, yet rivalry with Saudi Arabia means its actions hold significant influence on global policy

Mohsen Ghamsari, director for international affairs at National Iranian Oil, believes Iran could reach its target in two to three months. He noted that ‘Iran is close to the 4 million target, but the freeze is a political decision.’ In reference to oil minister Bijan Namdar Zanganeh, he noted ‘it depends on the minister’s decision [given that] we are now close to previous production levels.’

Verdict: Returning from sanctions and eager to raise production as a result, Iran has been one of the biggest output expanders in the past year. Saudi Arabia and Iran hold deep cultural and historical differences, which means Saudi Arabia is unlikely to freeze production while Iranian output keeps rising. Given that Iran seemingly has an end in sight, the likeliness of an involvement in price supporting measures is certainly rising. Arguably it has little to gain from opposing a freeze once its target is hit given the limited capacity to further raise output.

Conclusion

The environment from a production perspective appears to be moving towards a place where we could finally see enough action to prop up prices. The chart below indicates the Iranian production is approaching its pre-sanction levels, which could soon allow it to freeze production. This would in turn remove one of the key roadblocks to Saudi Arabia taking action itself. With the US outside of these discussions, it is interesting to note both Russia and Saudi Arabia have raised output to record highs, thus raising their market share which could be in anticipation of a freeze. Finally, the deterioration in US output is likely to provide sufficient confidence from both Saudi Arabia and Russia that their market share gains will not be soon eroded.

Crude oil production chart

Comments from Saudi certainly do not provide complete confidence that a freeze will occur, yet as the country enacts austerity and its budget dwindles, there is certainly going to be some interest in abandoning the policies adopted in recent years.

Finally, it is worth noting the decision to freeze would be notable, yet could do little to actually raise crude prices given the sky high supply we are currently seeing. With the US rig count rising once more, its output should start to rise again in the coming months and this could have a significant impact upon prices.

Finally, we have seen Saudi Arabia promise to maintain production below specific levels in the past and this has typically done little to restrict when their true production looks like.

Find out more about what's driving the price of oil

Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Denne informasjonen er ikke utarbeidet i samsvar med regelverket for investeringsanalyser, så derfor er denne informasjonen ansett å være markedsføringsmateriale. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder. Se fullstendig disclaimer og kvartalsvis oppsummering.

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.