Inflation could be supported September when OPEC meets for the second time to consider an output freeze. In the last meeting, a sanctionless Iran ruined any hopes for a deal when it asserted that it needed to resume production to pre-sanction levels. After a couple months and a 600,000 increase in Iranian output, OPEC members will try again. Investors initially traded the news bullishly, but losses on Monday and Tuesday this week suggest that most don't think that a deal will go through. The pessimists have a good reason to doubt the chances as well; the current state of the oil market is bullish for countries and companies looking to produce more. OPEC's own monthly reports have set the scene perfectly with updated data.
- Spot prices are significantly higher
Every major crude oil spot price is trading higher over the past couple of months. Brent crude and the OPEC basket price have gains over $1,00 higher than WTI crude oil suggesting the international oil market may even be more balanced than the U.S. market despite the output freeze failure. The members' own price metric has grown the most according to a percentage calculation implying their situation may be improving faster. If an output freeze couldn't be negotiated at April 17th prices, then a deal in September will be unlikely especially considering an end-of-the-year target around and above $50 a barrel for Brent and WTI.
- Oil consumption estimates and projections are bullish
Monthly reports gauged global oil consumption as higher in August than in April. For the month of April, world growth in consumption was expected to be 1.2 million b/d for the 2016 year, but four months later, the same number came in 30,000 barrels higher at 1.22 million b/d. The increase is not enormous, but it asserts a positive outlook on the demand side which will bolster more production from OPEC members. The report upgraded demand estimates for North America, Europe, Africa, and India. The important players are India and Africa as they will be major sources of demand growth in the near future. On the other hand, Chinese demand was revised slightly lower along with Latin America which had the largest decline. A source of concern may be China's flat demand trend. The Asian giant is a neighbor to many OPEC members, and thus, has become their biggest consumer. A strong China is necessary for the cartel's survival. Oil product markets also looked to be heating up in some areas of the globe. In the United States, the product markets showed more demand which could bolster OPEC exports. Asian markets, though, appeared to weaken. This bearish concern may outweigh U.S. product demand strength in the long run.
Since the oil market is turning in their favor, participants at September's summit will be less likely to conclude with a deal negotiated. Yes, revenue streams are still pinched, but the small amount of breathing room that the market has allowed will send producers into a wild-goose chase for more market share. The competition could threaten the survival of the oil cartel, in the long run, a death that would shake the global economy to its core. With two important meetings in September (Fed and OPEC), the month has the potential to instantly shift the current market trend in either direction.