Energy

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

When the OPEC nations last met with Russia to agree an output freeze, back in April, it was Saudi Arabia that shot down the deal -- refusing to take part without Iran. This time both countries may be more accommodating; the stumbling block is more likely to be Iraq.

OPEC members are planning an informal meeting in Algeria in late September, where discussions of a freeze could be revived. In April, the Saudis refused to limit output unless Iran did the same. Not surprisingly, as it was still raising production after the easing of sanctions, Iran refused and the Saudis walked away.

Things are different now. Saudi production has surged, hitting a record 10.67 million barrels a day last month, according to official figures. That's almost 450,000 barrels more than the January level on which that last failed deal was based. The kingdom might be willing to adopt this as a ceiling, at least temporarily. After all, domestic demand will start to fall in line with its normal seasonal pattern in September. Freezing output at a seasonal high point is much more attractive than doing it at the seasonal low.

Saudi Oil Surge
Saudi Arabia's oil production hit a record 10.67 million barrels a day in July
Source: OPEC
NOTE: Official crude oil production data submitted to OPEC

Iran's production has risen too. It's within a whisker of pre-sanction levels, as the chart below shows. Tehran had said that it wouldn't contemplate a freeze until recovering all that output.

Iran's Rapid Recovery
Iran has restored output to within 80,000 barrels a day of its 2011-average level
Source: Bloomberg
NOTE: Sanctions on oil exports introduced by the U.S. and EU during the first half of 2012 were eased in January 2016.

Iran still isn't likely to accept a cap while neighbor Iraq and arch-rival Saudi Arabia continue to boost supply. But its grounds for opposition are diminished. It's determined to get to 4 million barrels a day by the end of September. And if its production reaches a point where it can't be raised further without significant investment and a long lead-time it might, just might, agree to a freeze to call the Saudis' bluff. 

So Iraq is the most probable holdout. Almost the first action of new oil minister Jabbar Al-Luaibi was to ask oil companies operating in the south of the country, including BP, Shell, Lukoil and CNPC, to revive spending plans that they were ordered to shelve earlier this year and to boost output. The results won't be immediate, but they could come soon enough to conflict with any undertaking by Iraq to freeze production at the current level.

Nigeria, too, will balk at freezing production at its current level, which has fallen by about 500,000 barrels since January because of sabotage in the Niger River delta region. A temporary ceasefire by the Niger Delta Avengers militant group, who claim responsibility for most attacks, could let companies restore some of that production.

Nigeria's Lost Output
855,000 barrels a day of production is subject to force majeure - 42% of January's output
Source: Bloomberg
NOTE: Force majeure is a legal term that allows companies to walk away from export commitments. It does not necessarily mean that the entire volume affected is lost.

Russia, an architect of the April gathering, also seems wary of risking a repeat of the embarrassment inflicted by the Saudis last time. So it will play its cards carefully.

This won't stop others in OPEC from continuing to promote the idea of a freeze. Nor will it prevent the oil price from jumping on every hint of a deal -- no matter how absurd. Just don't expect to wake up in late-September to a world in which OPEC and Russia have reached a credible agreement on a cap.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Julian Lee in London at jlee1627@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net