Meeting of oil producers – much ado about nothing - Commerzbank

At the oil producers' meeting in Algiers n, there is unlikely to be a voluntary limit on production, said Eugen Weinberg, Strategist at Scotiabank, adding that such an agreement would be at odds with OPEC's current strategy of defending its market shares. Commerzbank has lowered their price forecast for both the coming months and next year.

Key Quotes

"Algiers will be hosting the biennial meeting of the International Energy Forum, which will also be attended by representatives of all the oil-producing countries. Some OPEC members evidently see this as a good opportunity to discuss measures to stabilise the price of oil. Hopes of some investors that an agreement on a voluntary production limit will be achieved, have helped to support oil prices over recent weeks." 

“However, we do not expect any workable agreement to be reached, for a number of reasons: • Most oil-producing countries probably do not regard current price levels as a serious threat to their economies, and are thus content to await further developments. Were this not the case, far-reaching decisions would no doubt have been made at the regular OPEC meeting in June, or an extraordinary meeting would have been convened. • The main concern of OPEC at present is evidently defending its market shares. In contrast, the organisation always responded to price signals up until two years ago: When prices were too high, as in 2008, production was increased, and vice versa. Since the abrupt change of course two years ago, most OPEC countries have raised their output on a grand scale, despite falling prices, probably as a means of stabilising their earnings over the short term. OPEC production is already higher than the demand for OPEC oil next year, according to IEA estimates . Moreover, daily output could still be raised by some 2 million barrels if Libya and Nigeria returned to pre-crisis production levels following interruptions caused by internal disputes.” 

“In the long run, the latest OPEC comments and the resulting temporary boost to oil prices might even prove counter-productive. For one thing, OPEC could lose the last shred of credibility it has built up over decades, some of which has been eroded during the past two years. In addition, US shale oil producers in particular could take advantage of current higher prices to safeguard prices and then raise output sharply, which would further swell the surplus next year. Consequently, we have lowered our year-end price forecast for Brent from $50 to $47 per barrel. And in 2017 as a whole, we now envisage an average price of no more than $53, down $5 from our previous forecast.”