Saudi Arabia

Crude prices have been able to recoup a big chunk of the losses they suffered on Monday afternoon. At the time of this writing, Brent oil was trading at $51.60 a barrel, a good $1 better off compared to the low hit on Monday, while WTI was trading at $50.75, likewise $1 higher from its corresponding low.

Crude prices jumped in reaction to the latest weekly US crude stockpiles data but then quickly went into reverse gear, before bouncing back once again. Traders were in no mood to take any chances ahead of the conclusion of talks between the OPEC and non-OPEC members in Algeria, especially given how headline-driven prices have become.

Ahead of next week’s talks in Algeria, Reuters reported this morning that Saudi Arabia is apparently willing to reduce its oil output for as long as Iran agrees to freeze its production at current levels.

Since Friday, the West Texas Intermediate (WTI) US benchmark for crude oil has been rebounding from a critical price juncture around the $43 level. This rise has been driven primarily by tentative hopes for an agreement among Russia, Saudi Arabia, and potentially other OPEC members to limit oil production in the interest of steadying crude prices. Also helping to boost crude oil in the past few days has been a weaker US dollar, which has been pressured by diminished expectations of a September Fed rate hike due to a string of relatively weak US economic data since late last week.

North American investors are away in observance of the Labor Day. Understandably, it has been a quiet day in FX, bond and stock markets. But for one particular market, it has been an exceptionally volatile day. Crude oil took a roller coaster ride, rising nearly 5% this morning before giving up much of those gains.

Sunday’s meeting of crude producers in Doha ended without any agreement to curb oil production. The reaction of oil prices has been logical: a six per cent gap down at the open overnight. Oil prices have since rebounded strongly off their lows, in part due to short covering. Clearly, many people were surprised that after so much talk, a 'freeze' deal, which had looked imminent last week, failed to materialise. At the end, Saudi Arabia’s position to maintain market share was the reason talks collapsed as it wanted all major non-US producers – in other words, Iran – to be part of any freeze deal. But I wonder how such a deal would have changed the fundamentals in any way. As Oman's oil minister said, many oil producers with the exception of a few such as Iran are already at peak production capacity anyway. A deal to freeze oil production at these peak levels would therefore not have helped to immediately reduce the supply glut significantly quicker than would be the case now. In fact, one could argue that by maintaining the status quo and with oil prices being notably higher than back in January and February, there was less motivation for the Saudis to compromise as they can afford to play out their strategy of driving weaker US shale oil producers out of business. Now that US oil output is finally responding to the significantly weaker oil prices, the market can, over time, re-balance itself anyway without the need of intervention from the OPEC and Russia.  That being said however, a deal to freeze production could have sped up the rebalancing process slightly.