Oil Rally Continues As UBS Warns Of Pointlessness Of OPEC Stabilization Talks

UBS says a freeze is likely just as difficult as the failed attempt back in April, but arguably not as needed.

Despite some investors cashing in early on Tuesday, Brent futures closed up at $49.23 per barrel and West Texas Intermediary settled at $46.58, helping the market maintain a 16 percent rally since early August.

The rally is largely due to investor optimism over the notion of oil producers agreeing to some form of production strategy to reign in oversupply when they meet in Algeria in September – even though the daily price gains have been accompanied by a slew of analysts warning that none of the circumstances that caused the failure of past talks among Organization of the Petroleum Exporting Countries (OPEC) members have changed.

Even Emmanuel Ibe Kachikwu, oil minister for Nigeria, who has repeatedly placed his faith in OPEC reaching some sort of stabilization deal, this week wrote on his Twitter account, "Optimism on my part is quite sparse, but I believe engagement with the 70 percent oil producers might have an impact."

But if OPEC's past performance at the negotiating table can't dissuade investors from looking at the bright side of things, UBS says market circumstances may render any talks of a freeze or other initiatives as meaningless: it forecasts substantial declines or a flattening out of production from key countries due to civil unrest.

Specifically, UBS predicts a drop in Iraqi oil production following militant attacks at the Bai Hassan field in the northern part of that country, as well as a decline in output from Nigeria, because of the resumption of militant activity.

This combined with no increase in Libyan production due to tension in Zuwetina (which has made it difficult to reopen the country's eastern ports) and other factors compels UBS to see WTI crude averaging $43.81 per barrel in 2016 and $57.00 per barrel next year, just a hair above consensus forecasts of $43.30 this year and $54.25 next.

Jon Rigby, analyst for UBS, writes, "Our view is that agreeing a freeze is likely just as difficult as in April (while Iran is approaching pre-sanctions output, Libyan and Nigerian production remains depressed), it's arguably not as needed ... and likely has little effect on actual market balances, with most of OPEC running flat out and Saudi output seasonally ramping down by September after peak summer demand."

He adds, "Experience would suggest to all market participants that any meeting will likely be a complete non-event, and the price reaction likely indicates current market positioning rather than any genuinely meaningful expectation."

Earlier this week, Michael Tran, commodity strategist at RBC Capital Markets, wrote in a note, "We caution bulls on becoming overly exuberant," and that "Any plan of action would largely be symbolic and sentiment-driven."