News of OPEC’s output freeze talk helped oil prices rally spectacularly last week
One of the key factors that supported oil prices recovery in the last few weeks was the news from some of OPEC’s members who are calling once again for an output freeze deal. Positive comments were given by both, Saudi Arabia energy minister Khalid Al-Falih and Venezuelan President Nicolas Maduro, which lay the groundwork for a possible talk end of September to discuss the possibility of oil producers freezing their oil output to support oil prices.
This is not the first time OPEC’s oil producers give the oil market a fake hope that an output freeze deal could be reached. In fact, we still remember Doha’s meeting and its disappointing outcomes. When we look at the situation now and then, we realize that there is no much difference.
Back then, oil prices fell below $30/bbl. The oil market sentiments were bearish, and many oil analysts were expecting oil prices to fall as low as $20/bbl. The direction in which the oil market was heading scared oil producers. And consequently, some of OPEC’s members as well as other oil producers threw the idea of an output freeze deal. The duration since announcing the news of the output freeze deal until its actual meeting helped oil prices recover at that time.
But the result of Doha’s meeting ended up with a failure to reach an output freeze deal, mainly because of Saudi Arabia’s refusal to freeze oil output unless Iran does too. At that time oil prices were already well above $30/bbl, and the news didn’t have much impact on oil prices. The oil prices rally continued on support from different factors.
In a similar way now, the news of a possible output freeze talk by OPEC’s members came after oil prices fell below $40/bbl. Oil market sentiments were bearish during the last few weeks. U.S. crude inventories were not falling as expected and gasoline inventories were increasing. The increase in U.S. rig count was accelerating, and U.S. oil production recorded few increases during early to mid-July. Hedge fund managers increased their short positions and oil market analysts expected oil prices to fall sharply again.
These negative news scared OPEC’s members again, and they decided to play the same old game. Announce a possible oil output freeze talk. Oil prices will stop falling, and reverse a course. Then, let the talk takes a month or more. Keep sending positive signals everytime there is a negative sentiment that could drive prices down. The news of “output freeze talk” throughout this period will help change the state of the oil market from negative to positive, just like it did few months ago.
When the output freeze meeting date comes, some producers will come up with an excuse not to agree on freezing their oil output. And the meeting will end up as a failure in a similar way like its previous version.
When that time comes, oil prices will be at a high level. The oil market will be in a better state than it was few weeks ago. Other parameters might support oil prices like what happened few months ago. And these oil producers talking about freezing their oil output right now will be producing more oil when their meeting in September fails to reach an output freeze deal.
To make it crystal clear, OPEC’s members are not freezing any oil output, they are simply playing the emotion game to help the oil market get through this difficult time.
They come in when the oil market is full of pessimism and negative sentiments, and they give it what it needs; a hope, but a fake one. Investors and traders know that this hope is a fake, but they hang on to it. Becuase when you are drowning, you hang on to whatever you see.
That hope prevents oil prices from falling further and supports its recovery. The good news is, everyone wins in this type of games. And when the game is over, oil prices are higher. At least that is what we saw last time. But this time, I dont think the emotion game will end up in a similar way. Only the coming days will tell.
