This article was written by Evdokia Pitsillidou, Risk Management Associate at easyMarkets.
Oil prices have surged this week, as investors clung on to vague hopes that OPEC, Russia and other major producers would agree to freeze production at an informal meeting in Algeria next month.
The price of Brent crude rose nearly 12% over a four-day winning streak, reaching its highest level in five weeks. The futures price was trading well north of $49 a barrel Tuesday. For the month of August, Brent crude has added around 17%, nearly reversing all of last month’s drop.
The West Texas Intermediate (WTI) benchmark for US crude futures has experienced similar gains over the past four days. The WTI contract reached a daily high of $46.60 a barrel Tuesday. Just two weeks ago, the contract was trading below $40 a barrel.
The latest rally in crude prices has been driven entirely by optimism that major oil producers would agree to curb output at an informal meeting at the International Energy Forum in Algeria on September 26-28. Qatari energy minister and OPEC president Mohammed bin Saleh al-Sada confirmed the meeting last week. Since then, Saudi and Russian oil ministers have come out in support of further cooperation on a potential production freeze.
But analysts have been quick to warn that we’ve seen this song and dance before. Optimism that Russia, Saudi Arabia and other major energy producers would agree to freeze production at the Doha Summit in April supported a months-long rally in crude prices. The markets were sorely disappointed after producers failed to reach an agreement. Experts say there is a distinct possibility that investors will be disappointed again after next month’s meeting.
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OPEC pumped 33.24 million barrels of crude per day in July, as the producer group added Gabon to its ranks, bringing the cartel to 14 members. For the 13 established OPEC members, production actually fell by 80,000 barrels per day last month due to continued supply disruptions in Nigeria.
The International Energy Agency (IEA) expects crude production to fall behind demand later this year, sparking hopes of a more balanced recovery in prices. Steadily rising demand will “help pave the way to a sustained tightening of the crude oil balance,” the IEA said in a report last week.
Until then, any sustained rally in crude prices will likely be driven by speculation as opposed to any fundamental rebalancing. A weak US dollar is also playing a role. The dollar plunged to more than seven-week lows on Tuesday, as traders continued to lower their expectations for higher US interest rates.