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Crude has rebounded but will an OPEC freeze materialise?

The market is anticipating a more conciliatory tone from OPEC producers in coming weeks.

oil workers on rig
Oil market bulls are positioning for a 'freeze'

There’s little hope of the magical disappearance of the global oil oversupply on the oil market, but a drop in US crude and gasoline inventories last week sent a positive sign to traders.

The market is also anticipating a more conciliatory tone from OPEC producers in coming weeks.

All this helped boost the oil price by the end of this week with Brent crude back over US$50 and WTI higher than US$48 a barrel.

Bulls fancy a freeze

The news headlines have been bullish this week about the possibility of an OPEC production freeze supported by the Russians.

This freeze had been touted as a possible solution on two former occasions, but full agreement could not be reached among all players.

There’s no sUBStantial reason to indicate that it will work this time, but the market moves on sentiment, and right now, that sentiment is encouraging.

The move is being hailed by former oil ministers from Algeria and Qatar with both agreeing that the “psychological” boost would help the market at this stage.

While any production freeze would be positive, the reality of the current production cycle appears contradictory.

Talk of cooperation among OPEC members is not new, but there’s been no public declarations from Iran or Iraq, two key members who have been increasing output to help revive their crippled economies.

No commitment from Iran

Iran is making no formal commitment in advance, claiming it has not yet reached its desired production levels.

The former head of Iraq’s South Oil Company, Jabbar Al-Luaibi has been appointed as the country’s oil minister and he will want to be seen to be taking positive action to help boost the country’s energy industry.

While Saudi Arabia publically supports a sense of balance on the oil market, the country continues to pump at record levels.

Former OPEC president optimistic

A former OPEC President and oil minister of Algeria, Chakib Khelil told Bloomberg this week that he was optimistic about a production freeze as the main players were currently producing at capacity having gained the market share they sought to achieve.

He added Russia to this mix, saying they are all “reaching their top production level.” 

OPEC ministers will meet informally as the majority of them will be attending the International Energy Forum’s gathering in Algeria at the end of September.

Expert onlookers remain skeptical

The analyst community is a bit skeptical having heard this production freeze prospect before and UBS Group AG as well as Commerzbank are not optimistic.

The hype of a production freeze may not be necessary as Bank of America Merrill Lynch believes the fundamentals are improving.

The bank sees this current price range as a buying opportunity, predicting a rally to US$69 by the middle of next year.

Domestic oil production in the US has been slowly on the rise and any increase in the oil price could tempt more independent producers back into the market.

Last week, American production was up at its highest level in 17 months; more than eight and a half million barrels a day.

Production in Latin America has declined with a variety of issues in Venezuela compounding the problem. Production in Nigeria and Libya remains uncertain but no-one is expecting Libyan production back on line anytime soon.

Volatility could switch at any time

It has been a good week for the oil market, but the volatility in the sector could turn at any time.

Investors and traders will look for the positive headlines, but the necessary rebalance of supply and demand is still a way off in order to bring sustainable calm to the market. 

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