Energy investors got all excited last week on hints of a freeze deal among major oil producers, but anyone hoping for coordinated action to boost the struggling oil market is bound for disappointment, said Morgan Stanley.
In a note out on Monday, strategists led by head of energy commodity research Adam Longson warned that an output agreement between members of the Organization of the Petroleum Exporting Countries remains “highly unlikely” as the cartel members battle for market share.
“The market treats OPEC as the central banker of oil where simple jawboning can move markets and scare off shorts,” they said in the note.
“However, we see too many headwinds and logistical challenges to a meaningful deal given past statements by OPEC and its members.”
Last week, crude oil US:CLU6 logged its best week in more than five months as traders held onto expectations OPEC members will agree on a production cap at its informal meeting at the International Energy Forum in Algeria next month.
Hopes of such a deal were spurred after OPEC kingpin Saudi Arabia hinted it would stop the price slump, with oil minister Khalid Al-Falih saying his country was ready to “take any action to help the market rebalance” if necessary. The minister stressed that any move would have to be in cooperation with OPEC and non-OPEC producers.
But according to the Morgan Stanley strategists, the market may have gotten prematurely excited and misinterpreted the Saudi comments.
“This is the same talking point the kingdom has been using for some time. It neither acknowledges the need for action, nor firmly commits Saudi Arabia to participate if certain parameters are met,” they said.
“It is unlikely Riyadh will take any freeze negotiation seriously as officials believe the market share policy is slowly, but surely working,” they added.
The idea of a production freeze was also pitched earlier in the year, but was quashed at a highly anticipated meeting in Doha, Qatar, in April when Iran refused to get onboard with the plan. The Middle East nation was in the midst of ramping up production and exports after international sanctions were lifted in January following a nuclear deal with the U.S.
However, even if the cartel — against Morgan Stanley’s expectations — is successful in sealing a deal this time, it won’t provide much of a boost for oil prices, the bank said.
“OPEC supply is currently at record levels, spurred by both seasonal increases in domestic demand and members’ current market share maximization policies,” the strategists said.
“With more than a month until the International Energy Forum in Algeria, markets may lose interest in prognosticating a deal. However, as the meeting approaches, it would not be surprising if market chatter and volatility increased,” they added.
Oil prices slumped around 3% on Monday and continued lower on Tuesday, with crude down 0.6% at $47.12 a barrel and Brent LCOV6, -0.92% off 0.3% at $48.99 a barrel.