There has been a little euphoria in the oil market as prices over the last two weeks or so have been moving upwards to break through unexpected levels at this time of the year and the prevailing fundamentals.

The reason for this recent movement is believed to be a perceived readiness to stabilise the oil market by producers who suffered a great deal by the precipitous fall in prices since mid-2014. The statements from major producers have buoyed the market, with the Saudi energy minister Khalid Al Falih saying on August 11 that his country is open to suggestions to stabilise the market.

This was followed by a statement from the Russian energy minister Alexander Novak who said his country “is consulting with Saudi Arabia and other producers to achieve oil-market stability”.

“Rumours and murmurs” of actions to stabilise the market were followed by the announcement of an informal meeting of Opec members in Algeria to be held on September 26 and another meeting between Saudi Arabia and Russia in October. These meetings are seen as attempts to revive the freeze on oil production, which was proposed by Saudi Arabia and Russia in February. The effort was scuttled in April when Iran refused to join the effort as its production was rising but still less than the level when Western sanctions were imposed.

At the time, other producers refused to give an exception to Iran.

While market participants and analysts were predicting a fall in prices to below $40 (Dh147) a barrel, the new statements changed the market direction. As I write Brent is at $50.87 a barrel and WTI at $48.3 and the Opec basket of crude oils at $45.34 on August 17.

This is a significant increase from the averages of July for the three crudes at $46.53, $44.8 and $42.68 a barrel, respectively. These were lower than the corresponding numbers in June by over three dollars a barrel.

Monthly reports

Fundamentally, there are little changes in the expectations for 2016 and 2017 as given by Opec and IEA previously. In their latest monthly reports, Opec said demand could increase by 1.22 million barrels a day (mbd) in 2016 and by 1.15-mbd in 2017. IEA is a little more optimistic, with corresponding numbers of 1.4- and 1.2-mbd respectively.

As for non-Opec supplies, Opec says that these would contract by 0.79-mbd in 2016 and 0.15-mbd in 2017 while the corresponding numbers from IEA are a contraction of 0.9-mbd in 2016 and a rebound of 0.3-mbd in 2017.

Therefore, the forecasts are more or less what we have seen in previous months with little adjustments here and there prompted by economic news or production increases or decreases in some countries. The commercial stock levels in the OECD countries are still at 3,093 million barrels at the end of July (or more than 300 million barrels over the last five years average).

Opec’s crude oil production in July rose to 33.11-mbd — according to it — and 33.39-mbd, according to IEA. And perhaps more by now. All the above fundamentals suggest that the latest price rally is driven strictly by statements of talking the oil market up and the “risk” that the upcoming meetings may succeed in bringing some action to boost prices.

The slowdown in price rise is driven by the scepticism raised by some analysts. Why is the Algeria meeting “informal”? Who is going to attend? Why is there a separate meeting between Saudi Arabia and Russia?

Force an agreement

If Iran is still opposing a production freeze, then what makes the coming meeting different from the failed attempt in April and the deliberate passing over of the issue at the Opec conference last June? Is the oil market in such a bad shape as to force an agreement?

Prices have improved on their own momentum as the market approached some balance. Iran is still adamant in its opposition to the freeze even though revenue-wise it would be to its advantage. Iran’s production is now over 3.6-mbd, but less than the target of 4 to 4.2-mbd it set itself to be its production before the sanctions.

And it is unlikely that it will reach this level by the end of September. Iran hasn’t decided whether to join the Algeria meeting anyway.

The oil minister of Nigeria also poured cold water on the upcoming meetings when he said: “We have difficulty building a scenario that would yield a bullish outcome to the talks”, as reported by the advisory firm Ritterbusch & Associates.

In any case, a freeze may be psychologically good for the market, but it will not change the fundamentals of oversupply and modest demand, Therefore the effect on prices may turn out to be minimal.

Failure of the upcoming meetings may plunge prices to where they were or even lower.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.