Hints of Saudis Supporting Price Stabilization Prompt Market Gains, But Analysts Still Unsure of Outcome

Khalid Al-Falih, energy minister for Saudi Arabia

For the second time this week, word that the Organization of the Petroleum Exporting Countries may be more inclined than ever to initiate a production freeze sent oil markets soaring, with West Texas Intermediate futures climbing on Thursday as much as 5 percent before settling at 4.3 percent, or $43.49 per barrel, and was continuing to make gains of over 2 percent in Friday trading. 

But this time, the news –  in the form of Khalid al-Falih, energy minister for Saudi Arabia, declaring that freeze talks will indeed take place in Algeria late next month – has caused normally cautious observers to think there may finally be substance to the talks, if for no other reason than achieving stable oil prices is in the Saudis' best interests.

Helima Croft, head of commodities strategy at RBC Capital Markets, explained, "Thirty dollar oil isn't great if you're talking up the prospect of your IPO," in reference to Saudi Deputy Crown Prince Mohammed bin Salman's scheme to transform his kingdom's economy by selling a portion of state-owned Saudi Aramco, a move that could result in a $2 trillion sovereign wealth fund if properly executed.

Indeed, al-Falih was quoted as saying, "There is an opportunity for OPEC and major exporting non-OPEC ministers to meet and discuss the market situation, including any possible action that may be required to stabilize the market."

However, the Saudis have also repeatedly stated that they won't consider any production restraints unless all members play along, and Iran has steadfastly refused to be part of any such policy; too, the main reason the Saudis are currently pumping record amounts of oil is to keep competitive shale producers at bay – and resilient U.S. producers would presumably be motivated to increase production were prices to stabilize and then increase.

Still, Michael Wittner, global head of oil market research at Societe Generale, conceded that $40 oil "could be a wake up call" for OPEC act; but he reiterated the familiar argument of analysts by pointing out, "If you're talking freeze, it's not going to make a damn bit of difference for real crude supply: Russia is maxed out; Iraq is maxed out or close; Iran is maxed out or close to it, and the Saudis are out with a big number in July but that's seasonal, and they'll be coming down.

"The freeze would solidify the status quo, and it wouldn't do anything but give a boost to market psychology."

Siding with Croft's outlook is Jim Ritterbusch, president of Ritterbusch & Associates, who suggests that the build up to another round of talks is little more than a carefully choreographed bid to benefit a single OPEC member: "The Saudis benefit from talking this market up ... they buy a little time and give the market a chance to acquire better balance.

"If at the end of the day the Saudis don't go along with an agreement to cut production, the market will go right down, just like last time."

Mark Routt, chief economist for the Americas at KBC Advanced Technology, earlier this week said that Saudi Arabia's record July production of 10.67 million barrels per day plus other factors only exacerbates the global inventory glut, and that "unless and until inventories drop, we will not see a sustainable increase in crude prices."