This time, OPEC could be ready to do a deal in Algeria

Oil markets are gearing up for an informal meeting of oil cartel OPEC in Algeria next week and RBC Capital Market’s respected oil expert, Helima Croft, has predicted that – this time – the meeting could produce some kind of deal to freeze oil output or return to a country-specific quota system.

The 14-country producer group is meeting on the sidelines of an energy conference in Algiers on September 26-28 and, yet again, there are hopes among market-watchers that the producers could reach an output agreement.

For more cynical analysts, however, the meeting will only be another talking shop where the group and its oil ministers will “talk up” the oil price, promising joint action to support prices and stabilize the market yet ultimately failing to deliver.

Things have changed since Doha

However, RBC’s Helima Croft and her colleagues, commodity strategists Michael Tran and Christopher Louney, said in a note entitled “OPEC Watch List: The Battle of Algiers,” that circumstances have changed since April, when OPEC met in Doha and failed to reach an agreement to freeze oil output – largely because Iran wanted to get its production levels back to pre-sanctions levels.

“Heading into the special OPEC meeting in Algiers…In our view, the odds are in favor of the cartel opting for pragmatism and announcing a moderately constructive framework,” they wrote.

“Since the failed meeting in Doha, much has changed. Iran is now on the cusp of producing at pre-sanctions levels. Senior Saudi officials have seemed more supportive of bringing back market management measures; and depending on the framework, it could work for Libya and Nigeria, who each have large portion of production shut-in for security reasons.”

The comments by Croft and her colleagues come as oil markets have watched the various meetings of energy and oil ministers since Doha with interest. In particular, the announcement by Saudi Arabia and non-OPEC oil producer Russia this month that they would co-operate on monitoring and stabilizing oil markets was greeted with enthusiasm by markets despite being short on details.

RBC’s Croft and her colleagues noted that Russia and Saudi were again expected to meet in Algiers and could build on the announcement.

“With OPEC and Russia set to meet on the sidelines next week, market participants will be eagerly watching to see if the increasingly cash-strapped sovereign producers will be able to reach the collective output agreement that eluded them in Doha,” Croft et al wrote.

“This time, we believe that the environment is more conducive to some type of deal, and if there is not enough time to iron out all the details in just a few days, the ensuing statement will strongly suggest a willingness to act at the November meeting (assuming that market conditions remain challenging),” they said.

Quota action come November?

Croft and her colleagues suggested that OPEC’s formal meeting in November could be the setting for a solid decision on freezing oil output levels or even agreeing to return to a system of output quotas for each OPEC member country as proposed by Iran.

“Perhaps most compelling (a reason to reach a collective output deal), many of the biggest and most influential producers are close to maxing out and hence may judge that there is little downside to agreeing to cap output at current levels or sign up again for a collective ceiling,” Croft said.

“With little left to lose in agreeing to some sort of market management, most other forms of cartel cooperation look quite constructive, in our view. In fact, we think the market would applaud efforts towards installing a system of checks and balances applied at the country or group level,” she added.

Croft said that the “likely the most feasible (and likely moderately bullish) solution in our view” was to reach an agreement on a quota system, although she conceded that “in the past, attempting to agree on individual hard quotas is a slippery slope for OPEC (particularly given Iran’s rising production and depressed output in countries like Nigeria, Venezuela and Libya).”

Still, she said that such a system would accomplish several things: “Most notably, a unified cartel would help to install a floor in the market, as quantifiable measures should hold members accountable. Additionally, such a framework could be struck in a way that it accommodates Iran’s return to pre-sanction production levels. We view this as likely because the cartel historically has made country level concessions under certain circumstances.”

Summing up, Croft said that oil markets would not be forgiving if OPEC yet again made promises for some kind of deal to help stabilize prices without delivering.

“We place the odds of a repeat of the ‘Doha Disaster’ meeting rather low (as OPEC and Russia are cognizant of the market’s perception and will look to ensure that this time the outcome is more constructive), the market has grown increasingly weary of OPEC’s lack of action.”