Oil prices enjoyed a bump last week, thanks in part to a weakened dollar and some geopolitical tensions in the Persian Gulf. But a large factor in the recent rally has been the return of a possible OPEC production freeze, a subject that was last tossed around before the organization’s much-publicized, and ultimately unproductive, meeting in Doha last April. The likelihood of a freeze sent markets up on Thursday, though some less-than-confident comments from the Saudi oil minister sent them dropping back on Friday.

And we noted previously, the short squeeze ammo has been eviscerated in oil, disabling (for now) the 'freeze' headline risk…

Whether a freeze occurs or not is likely to be the trending gossip among speculators for the next month, at a time when such talk is exerting greater-than-average pull on the crude price, but as OilPrice.com's Gregory Brew notes, a question worth asking is whether a freeze is even possible, given the state of OPEC and the increasingly divergent interests of its fourteen members.

This new attempt at a production freeze comes as Saudi Arabia, OPEC’s largest producer and de facto leader, reaches a new production record of 10.67 million barrels, more than 400,000 more than when the last freeze was discussed, while its oil revenues continue to plummet. OPEC profits have fallen 55 percent since 2014, according to the EIA. Ecuador, Kuwait and other Gulf producers want the price to recover past $50 a barrel. If a production freeze is on the cards, it will be discussed in late September during an informal meeting of the OPEC states at the International Energy Forum in Algeria.

Iraq and Iran, OPEC’s number two and three producers, respectively, have offered tacit acceptance of a production freeze, with important caveats.

In the case of Iran, a freeze will not interfere with the country’s long campaign to re-capture market share, as oil minister Bijan Zanganeh made quite clear in a recent statement. The question of where, exactly, Iran’s production will reach before a freeze is open for debate. The widely-cited figure is Iran’s pre-sanctions production level of 4 million barrels, and the Iranian government has claimed that it will consider a freeze once production reaches this level.

If the current trend holds, Iran will reach 4 million barrels by September, in time for the Algeria meeting. Increasing production past 4 million will require new investment, which Iran is preparing to court with new contracts, and which it desperately needs in order to repair its infrastructure and expand beyond its aging fields.

But will Iran (or Zanganeh) be satisfied with 4 million? Iran’s all-time high of 6.3 million barrels per day was reached in the 1970s. It’s possible that Zanganeh will insist that Iranian production increase to its historic maximum, just as Saudi Arabia has allowed its production to sky-rocket. It may give tacit approval to a freeze, in order to bring prices up, but it’s unlikely to adhere to it in any practical sense.

In other words, Iran will agree to a production freeze…as long as it doesn’t have to participate.

Iraq, meanwhile, has been pushing as hard as it can to increase production in advance of any possible freeze. It has asked the international companies currently present in Iraq to increase investment and bring up production, which has already reached 4.78 million barrels per day. But companies are only willing to invest if they can be sure of compensation from the Iraqi state, which failed to deliver last year and had to instruct companies to bring down their level of investment.

Other OPEC members, including Nigeria and Venezuela, are facing nothing less than an economic Armageddon and are desperate for an increase in price. Nigeria however has seen its production decline to a 30-year low due to violence in the Niger Delta. Venezuela is less likely to make waves, as its economy has been hit harder than any other OPEC member by the current crisis, so any recovery in price would be worthwhile. But Nigeria probably won’t agree to freeze at current levels: like Iran, Iraq and Saudi Arabia, its leaders will want to pump more before bringing production to a halt.

So, if there is a freeze, where will production be “frozen,” exactly? Since April, Iran and Saudi Arabia together are pumping 1 million barrels more than they were the last time a freeze was contemplated. David Hufton, of the PVM Group in London, has noted that a 34 million barrel a day freeze “is not the same as one at 33 million barrels,” and that given current market conditions it could take a year for the price to stabilize at such a level.

This comes as the EIA estimates lower demand for oil in 2017, surging activity in wind and solar power, and increased interest in electric, AI-guided automobiles. Taken with the ongoing geopolitical factors tugging at OPEC’s frayed sense of coherence, including divisions among Middle Eastern states over the war in Syria and the ongoing Tehran-Riyadh rivalry, the state of oil production in OPEC’s many members makes a freeze agreement in late September look increasingly unlikely and, ultimately, impossible. What is possible, however, is that continued talk of a freeze will continue to exert influence over the market, which has see-sawed between bearish and bullish for weeks now.

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