Crude turns bullish amid talks for OPEC production-freeze

The law of supply and demand represents the change in price of a product by its availability and appeal. This theory is seen nowhere clearer than in the oil market. After reports of an upcoming Organization of the Petroleum Exporting Countries meeting in September were confirmed, oil futures rose as prices reached a seven-week high through Friday, Aug. 19.

As the 14 member countries prepare for the meeting in Algeria, the proposal for a potential output-freeze will once again be on the table.

Earlier talks for a deal to freeze output in the April meeting at Doha quickly fell apart due to tensions between Iran and Saudi Arabia. Iran, the only OPEC member to not participate in the April meeting, had its sanctions in the United States and European Union lifted in mid-January and has increased production to regain its market share to pre-sanction levels ever since.

The sanctions were first put in place following the Iranian Revolution and were later reinforced by the U.N. Security Council after the country failed to suspend its nuclear program. However, just as hopes of the OPEC nations reaching an agreement started to fade, Iran confirmed its participation in the September meeting on Tuesday, Aug. 23, giving oil bulls a huge sigh of relief.

Iran’s decision to cooperate with its OPEC counterparts could be a signal that the nation is back to or almost at pre-sanction levels and is now ready to negotiate.

The strong rally in oil prices has also reignited the activity for non-OPEC members, specifically the United States. Many oil producers who could not afford to run their operations at lower levels are returning to the scene in hopes of taking advantage of the recent spark in the commodity, a worrying sign for investors.

According to the Wall Street Journal, Devon Energy Corp., based in Oklahoma City, Oklahoma, is intending to increase its “2016 spending by 20 percent to as much as $1.3 billion, with plans to add up to seven rigs in Oklahoma and Texas.” Likewise, “Pioneer bumped up its budget by 5 percent, to $2.1 billion, and plans to put five rigs back to work, starting with one in September.”

The additional production may reverse most of the gains seen since the beginning of the month when the price of crude hovered near $40 a barrel.

Industry reports from the Energy Information Administration cited by CNBC indicated a rise in U.S. crude stockpiles by 2.5 million barrels in the week ending Aug. 19 over the expected 455,000-barrel fall.

Fears of a potential oil glut added to another drop in crude prices as U.S. West Texas Intermediate crude traded below $47 a barrel following Wednesday’s EIA report. Brent crude traded just under $49 after opening in the trading session at $49.50.

Saudi Arabia, OPEC’s de facto leader, reported record numbers for its production in the month of July and is on track to do it again in August.

As noted in an article by TheNational, “Saudi crude exports averaged 7.456 million barrels a day in June, down by almost 380,000 bpd compared with January, but up by 91,000 bpd compared with the same month a year earlier.” Saudi Arabia made it known to its fellow OPEC partners that it increased output levels at a record high of 10.67 million bpd and is capable of increasing that amount if necessary. The move could help the kingdom leverage its position during the September meeting in Algeria.

Falling crude prices have also hurt global oil-producing firms this year and have led to weak earnings reports. Oil companies PetroChina Co. and CNOOC took a huge toll on their first half earnings, keeping the bullish sentiment in the oil market in check. PetroChina reported a 98 percent dip in its net profit, falling from 25.5 billion yuan ($3.81 billion) to 531 million yuan ($79.8 million) through the first half of the year.

CNOOC, China’s state owned oil company, also posted disappointing figures with a net loss of 7.74 billion yuan ($1.16 billion) compared to the 14.7 billion yuan ($2.2 billion) net profit last year. The numbers should not come as a surprise as many U.S. domestic companies, such as ExxonMobil and Chevron, also saw their stocks plunge after reporting their lowest quarterly earnings since 1999 and 2001 respectively.

Exxon posted a net profit of just $1.7 billion in its second quarter, a significant drop from its $4.1 billion profit from just the prior year. Chevron, on the other hand, reported a net loss of $1.47 billion after a $571 million profit last year. Oil prices, which fell below $27 in January, have now rebounded more than 75 percent, but are still far below the $100 a barrel levels at which it traded a year ago. The two-year steady demise of oil prices has been a nightmare for some of the most valuable companies in the public market.

With less than a month remaining until the next OPEC meeting, oil producers have no choice but to sit tight and hope for a consensus to be reached soon.The International Energy Forum is scheduled to take place from Sept. 26-28.