21/08/2016 05:06 AST
While central bank officials are well aware that any statement can have an impact on monetary policies, OPEC is too starting to learn this lesson.
Some recent remarks from Minister of Energy, Industry and Mineral Resources Khalid Al-Falih, had such impact on crude oil prices, which rose 10 percent and quelled fears that the market is on the brink of decline.
Following calls from Venezuela for top producers to reconsider freezing production levels, Al-Falih said: "Saudi Arabia is ready to discuss any possible actions necessary to achieve price stability when he meets with OPEC ministers informally next month's conference."
The reaction of the market — the 10 percent price increase — was noticeable, especially to those monitors and observers who do not predict any agreement to come out of the Algeria meeting, even in the midst of the global economic decline due to lower oil prices over the past two years. However, prices did rise just as a result of the threat.
"It appears many observers believe OPEC members will take action at the end of the road," Jimmy Webster of the Global Energy Policy Center at Colombia University stated, adding that he himself does not believe the result will be any different this time."
Since 2014, the efforts of Saudi Arabia, began to show signs of success; OPEC production reached highest levels, while supply from non-OPEC producers are expected to fall this year.
This process takes time and leaves the price of oil exposed to attacks from suppliers upon signs of seasonal fluctuations, as was the case recently with the benzene market. Every time OPEC can reduce production, the intervention will be oral, as this is the best approach.
According to Ann Louise Hettl, a senior analyst at Wood McKinsey, every time the option of freezing production increases, this allows producing countries to overcome the difficult period until the balance to the market is regained.
The impact of the Saudi Arabia's statements on oil prices are a clear indication of the status of the current market.
Russia, the largest non-OPEC supplier, was in agreement of this during the Doha meeting in April, but the deal fell through at the last minute because of Iran's intransigence.
A top-level Gulf source at OPEC said the Kingdom believes the latest statements from Russia about the possibility of its intervention is positive to any cooperative efforts led by Qatar, Algeria, and Venezuela. With that, he admitted Iran's position was still uncertain.
After years of sanctions, Iran has been trying to regain its lost market share and had repeatedly indicated it has no plans to limit production. The Iranian oil minister had said it is yet to be decided whether Iran would attend the September meeting, according to media reports.
Another obstacle, according to analysts, is Iran's refusal to accept a ceiling to its production levels. Likewise, the Kingdom has increased production substantially to record levels of 10.7 million barrels per day last June, up from 10.2 million barrels in January.
The Kingdom typically increases is crude oil production during the summer months to meet electricity demand, but Al-Falih also indicated in his statements last week that the large demand for its oil is the reason it's production levels rose to highest levels.
Meanwhile, if talks fail, the market must not exclude the possibility that Saudi Arabia will keep production levels at those of July or higher.
However, investors will need to wait and see. If production remains high, the market balance may not be achieved until next year.
Arab News
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