Article / 16 August 2016 at 9:30 GMT

Opec won't agree to an output freeze – here's why

Head of Commodity Strategy / Saxo Bank
  • The Algiers meeting next month will not result in a new deal
  • The Saudis' aim was to stabilise the market and they succeeded
  • The verbal intervention altered sentiment and chased out shorts
 There's more than one reason why Algiers won't product and output freeze. Pic: iStock

By Ole Hansen

The verbal intervention in the oil market which initially came from weaker Opec members got a strong boost when Saudi Arabia's energy minister joined in last Thursday. While weaker members desperately need higher prices, Saudi Arabia's agenda was more likely to try to stabilise the market after having seen oil prices revert to a bear market in the weeks following the Brexit vote on June 23. 

What the Saudis actually succeeded in doing was to influence market sentiment and thereby force a reduction of what was a rapidly expanding speculative short position in the futures market. 

August and especially September tend to be challenging months for the oil market with oil supply rising as refinery demand slows. By preempting these developments a better sentiment has been engineered. The fear of freeze action will potentially be enough to dissuade traders from going aggressively short into September, a month where oil has falling for the past five years.

Seasonal weakness in September

Source: Bloomberg

Freezing at what for some are record levels while others are struggling (Nigeria and Libya) does not make much sense. The rebalancing process remains under way and higher prices will eventually be seen. But as long the market continues to struggle with an overhang of supply, price stability closer to but not above $50/b is probably the most Opec can ask for at this stage. 

While talk of a production freeze did most of the work to lift the price during the past week the continued weakness of the dollar has moved into the driving seat this Tuesday. The yen has been rising towards its key 100 level while the euro has traded up to €1.1270, a level not seen for eight weeks.

Bottom line: I do not expect Opec to freeze production at the International Energy Forum meeting in Algiers on 26-28 September.

Brent crude is challenging $48.45/b, the 61.8% retracement of the June to July selloff
Brent Crude oil, first month cont.
Source: Saxo Bank. Create your own charts with SaxoTraderGO click here to learn more

– Edited by Clare MacCarthy

Ole Hansen is head of commodity strategy at Saxo Bank. His Twitter account was cited by MarketWatch as one that investors should follow in 2016.

asena asena
Hi, Ole
asena asena
Due to ''price stability closer to but not above $50/b'' Should I close my position at UKoil, costs 48, 49$, :)
Ole Hansen Ole Hansen
@Asena. I'm not able to provide direct price advise in this forum for compliance reasons.
Ole Hansen Ole Hansen
A good run down of Opec's options from Reuters:
The Grinch The Grinch
Conditions on the Arab peninsular are far more unstable than perceived by most. The Emir have no option but to keep pumping in order to keep the everybody happy.


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