Increased oil price volatility, fueled by frustration with the slow pace of a rebalancing of oversupplied markets, is behind OPEC‘s decision to hold informal talks on the sidelines of the 15th International Energy Forum (IEF) in September. Initially, there were zero expectations that OPEC ministers would hold any meaningful discussions in Algiers but, taking the market by surprise, Saudi Arabia’s Minister of Energy, Industry, and Mineral Resources Khalid al-Falih on August 11 signaled his support for a meeting of both OPEC and non-OPEC producers in Algiers and, if needed, possible action to help balance the market.

After trading around $48 per barrel (bbl) for most of June, futures prices for U.S. West Texas Intermediate (WTI) crude drifted lower in July on reports that U.S. producers were increasing output levels once again, which sparked fears that the current record stock levels will rise further. Prices for WTI closed below $40/bbl for one day in early August but have since recovered and averaged around $42/bbl for the last 10 trading days, which is still 60 percent above the 12-year lows posted in February. WTI prices have rebounded by $2.50/bbl, and were last trading around $44.50, after Falih’s statement.

The current overhang of global oil stocks continues to weigh heavily on markets, with a Wall Street Journal survey showing investment banks reduced their forecasts for oil prices for the first time in four months in early August. WTI is now forecast to trade between $45 and $50/bbl in the second half of 2016 and average $55/bbl in 2017.

Qatar’s oil minister and OPEC’s president, Mohammed bin Saleh Al-Sada, emphasized in a press release that the recent decline in prices and current market volatility are temporary and that seasonally stronger demand in the third and fourth quarters will strengthen prices in the latter part of 2016.

Indeed, reports released this week from the three major forecasting agencies – OPEC, the International Energy Agency, and the U.S. Energy Information Administration – reaffirmed expectations that the rebalancing of oil demand and supply is underway, albeit slowly. Global oil demand growth is forecast to average around 1.3 to 1.4 million barrels per day (mb/d) in 2016 and up a further 1.1 to 1.2 mb/d in 2017. The IEA revised is forecast for demand growth marginally lower on weaker economic indicators but added demand would remain above trend, up by 1.2 mb/d to a record high of 97.5 mb/d in 2017.

At the same time, lower oil prices have continued to sharply reduce non-OPEC production this year though the agencies had differing views on the decline rates. The IEA sees non-OPEC production falling by a steep 900,000 barrels per day (kb/d), led by the more than 1 mb/d drop in U.S. production. OPEC projects a decline of just under 800 kb/d in non-OPEC production and the EIA estimates a 600 kb/d decrease.

The resilience of some U.S. shale oil producing regions has defied expectations, which has created a great deal of uncertainty surrounding forecasts for 2017. The IEA sees a recovery in supplies, with growth of around 300 kb/d while the EIA predicts further declines of 400 kb/d and OPEC forecasts production as flat with 2016 levels. The EIA said lower non-OPEC production this year is largely driven by “U.S. tight oil production, which has high decline rates and short investment horizons, making it among the most price-sensitive oil producing regions.” Additionally, the EIA projects U.S. crude oil production will decrease from the average 9.2 mb/d in the first quarter of 2016 to 8.2 mb/d in the third quarter of 2017, which would be 1.5 mb/d below the April 2015 level. The EIA also forecasts that in addition to reduced U.S. supplies, the North Sea and Russia will post some of the largest declines in 2017. OPEC estimated in its Monthly Oil Market Report that non-OPEC upstream spending was reduced from $750 billion in 2014 to $550 billion in 2016, with lower spending in 2015 concentrated on U.S. shale drilling while 2016 reductions are from mature offshore and new deepwater projects.

OPEC’s Informal Gathering May Yet Bear Fruit

The IEF meeting on September 26-28 in Algiers will bring together some 600 ministers, senior government officials, representatives from international organizations, and oil executives from the 73 member countries. The gatherings provide an informal opportunity for producers and consumers to discuss common interests and the forum does not issue any formal communiques. The theme of the biennial forum this year is “Global Energy Transition: An Enhanced Role for Energy Dialogue,” and it will focus on the outlook for oil and gas, renewable energy, access to energy services, and the role of technology, among other issues.

OPEC’s informal meeting on the sidelines, however, will likely draw the greatest attention. Initially, there were no expectations that ministers would announce a meaningful agreement to rein in production. However, Falih raised expectations for the Algiers meeting when he said in a statement to the Saudi Press Agency that “We are, in Saudi Arabia, watching the market closely, and if there is a need to take any action to help the market rebalance, then we would, of course in cooperation with OPEC and major non-OPEC exporters.”

The prospect for discord in Algiers was heightened after the forecasters this week reported OPEC production in July was at historic levels, almost solely due to record high output by OPEC’s Gulf members. The divide between OPEC’s richer Gulf states and its poorer African and Latin America members has long been a divisive issue, and never more so than when oil revenue plummets. The members managed to paper over their differences at the last ministerial meeting in June, however, with production at the highest levels in eight years, the issue of unrestrained supplies has been expected to resurface. Saudi Arabia reported to the OPEC Secretariat that its production reached the highest monthly level ever in July at 10.67 mb/d. Saudi Arabia traditionally ramps up output to meet stronger demand at power stations during the summer months when air conditioning use surges – in 2015, crude oil burned in power plants averaged 860 kb/d from June through August compared to 300 kb/d in the winter months, according to the IEA. Kuwait and the United Arab Emirates also pushed output to record levels in 2016. Iran and Iraq have had the largest increases in supply so far this year, up 560 kb/d and 500 kb/d, respectively.

Collectively, OPEC has increased production by a steep 2.1 mb/d since the controversial November 2014 decision to abandon production quotas and pursue market share. As expected, there have been clear winners and losers from this strategy. Over the period Saudi Arabia raised output by 1 mb/d, Iraq by 950 kb/d, and Iran 800 kb/d. By contrast, civil unrest in Libya and Nigeria has sharply constrained production capacity, down 400 kb/d and 370 kb/d, respectively. Political and economic turmoil in Venezuela has also sharply reduced production there, down by around 300 kb/d.

The sharpening contrast between the richer and poorer countries is causing a serious fracture among the group once again. Non-OPEC Oman is equally frustrated that OPEC has not focused on low oil prices and said it would not attend the meeting in Algiers. Oman’s Minister of Oil and Gas Mohammed bin Hamad Al Rumhy said he didn’t “see the point of continuing to be part” of the group. In what appeared as a veiled reference to Saudi Arabia, Rumhy added that “those who expected the expensive oil producers will be run out of the business and shut down their operations, have been proved wrong.”

All three agencies currently see a rebalancing of the global oil market gathering pace in the second half of 2017, as higher global demand and reduced non-OPEC supplies trigger a long awaited draw down in global oil inventories. Forecasts, however, are inherently subject to change and never more so than now with the enormous uncertainty surrounding the outlook for U.S. production and the staggering cuts in capital expenditure budgets for non-OPEC development projects. OPEC may add more clarity to the market in Algiers or a crack in the group’s fragile unity may inject further volatility into oil prices in the coming months.