Getting an Opec output cut won’t be a piece of cake

Louisa Bojesen
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Saudi oil minister
The Saudis are playing a strong game politically (Source: Getty)

With the US Federal Reserve and the Bank of Japan rate decisions out of the way, focus could now shift elsewhere.

Like towards the expected weaker US durable goods orders (which are, according to Credit Suisse, set to drop to -2.3 per cent in August compared to 4.4 per cent in July), or the oil ministers meeting in Algeria, where speculation is rife that we could see some type of a deal between members and non-members of oil cartel Opec to curb output.

On the data? Nobody cares about durable goods, or any other piece of data, these days – apart from jobless data, of course. We expect that the global environment will continue down a slow – or no – growth path. Anything else would just be a bonus. But the data points, apart from if they’re absolutely atrocious, aren’t going to change the US Federal Reserve’s thinking. We are still on course for a hike by the end of the year.

On the Algeria Opec meeting? They won’t agree to a curb in production. I will bet anybody an amazing cup of coffee. Sure, the Saudis have offered to cut their oil production – but only if Iran also says it will cap its output.

First, the Saudis are pumping at maximum levels. For them to cut a bit, from record high output levels to slightly less than record, that’s like praising your child for eating 19 cakes in one sitting instead of 20. It doesn’t make that much of a difference and the kid should maybe not have been eating 20 to begin with.

Read more: Saudi Arabia is acting like a drunken gambler in its oil war

And why should Iran go along with something as silly as that? From the Iranian perspective, they are not an aggressor (look at their history, they have never made the first move, yet they live in a part of the world where you have to pump up your feathers and appear larger and scarier than you actually are), and they are just coming back on to the oil market after a long period of sanctions. They have said before that they are happy to play oil-ball, just that they want to get back up to the “normal” speed they were at before the sanctions were imposed.

Politically, this is a great play by the Saudis, though. They aren’t technically friends with the Iranians, and would really like the world not to be friends with them either. So by offering to eat one cake less, but only if Tehran does the same, the Saudis come across looking great to all their other friends, and the Iranians look bad. The problem here is that Iran only had one cake to start with. Coffee anyone?

The only caveat here is that Opec meetings in Algeria have surprised in the past, with cuts to output announced following previous meetings. Maybe it’s something in the Algerian water.

So where will market focus be for the rest of the year? First and foremost, it’s going to be on something completely new and different – namely, the never-before-looked-at-and-waited-on Fed. And a close contender for that top spot will be the US presidential election. The question becomes: which will move the markets more? The US presidential election result or a 25 basis point Fed rate hike?

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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