The next trough in oil prices could come just as OPEC members gather in Algeria next month — and that could make for an interesting, and more unpredictable outcome.
While most analysts say OPEC members are all talk, and no action, some say there is an outside chance members could feel pressured enough to act if crude prices are in free fall.
Members of the Organization of the Petroleum Exporting Countries have said they would discuss at their late September meeting whether a freeze or some other action is needed to stabilize oil prices, after a number of high-profile failures to reach an agreement.
Talk of a deal, along with dollar weakness, has driven oil prices sharply higher in a short period of time, to a recent peak of $48.75 in West Texas Intermediate crude futures. But fresh data showing a continued overhang in U.S. supply knocked prices lower again, and WTI futures settled at $46.77 per barrel Wednesday.
"If oil's low, there's a chance they may forge an agreement, but it won't be worth the paper it's written on," said John Kilduff of Again Capital.
The next leg down could be driven by the annual drop-off in demand during the shoulder or maintenance season, when refiners shut operations to prepare for the refining of winter fuel. Between late August and October, this reduces the demand for oil every year, and it also comes as OPEC producers are feeling the pinch of long-term low crude prices on their budgets.
"The underlying factor is the balance is really fine between supply and demand and we're going into a weaker season for demand," said Edward Morse, head of global commodities research at Citigroup. "It's not as deep a shoulder season as the spring. I think the market remains range bound, and it's going to be moving one way or other, based on gossip."
Citigroup expects Brent to average $47 per barrel in the third quarter and $50 a barrel in the fourth quarter. Morse said the price could bottom around $40 during the refining maintenance season.
"I think $40 is within reason, and I think it goes to $39.50 and the market goes long again," said Morse.
Some producers, like Saudi Arabia have been hoping to tap the debt market again, and firmer oil prices work in their favor, according to Helima Croft, global head of commodity strategy at RBC Capital Markets.
This week, Iran said it would join the talks between OPEC and other producers, to be held on the sidelines of an energy conference that runs Sept. 26 to 28 in Algeria. Disagreement between Iran and Saudi Arabia unraveled efforts at earlier meetings, including a particularly disappointing April meeting in Doha, Qatar, between OPEC and other producers. Iran stood fast on not curbing production and Saudi Arabia said it would not agree to a freeze without all producers' participation.
"It's not my base case, but you have to think there's a good chance they would do it. I don't understand how people will reflexively say 'no, no, no,'" said Croft. "I clearly saw there was a difference in the Saudi tone. Saudi was willing to convey that they care about OPEC. They care about the collective cartel." Croft said Saudi Arabia's posture had changed at its last meeting in June, with its new energy minister, Khalid al-Falih, taking a more conciliatory tone.
But Morse does not expect a deal to be struck in Algeria, partly due to the relationship between Saudi Arabia and Iran.
"The Russians used a base of theirs that nobody knew about in Iran to bomb Syria. Do you think the Saudis are going to do something nice for the Iranians a month after that? I don't think there's anything that changes on the existential problem in the oil market and the existential problem in the neighborhood," said Morse.
Croft, however, said the changes in Saudi Arabia, with Deputy Crown Prince Mohammed bin Salman taking a new more active role is one factor that could influence the outcome.
"I think at the end of the day these countries care about a flusher Treasury. I think the revenue imperative sometimes trumps your anger with a regional rival. I think the Russians are very good at this. I think they're transactional," she said. "Things have been unpredictable in Saudi Arabia since the rise of Mohammed bin Salman. How do we expect predictability with how they're going to manage OPEC? I just think there's more of a door open for a surprise."
Bin Salman is guiding a program of economic reform and expects to take the state-owned oil company Saudi Aramco public in order to build a massive sovereign wealth fund that could diversify investment away from oil.
Another challenge for OPEC would be that it could trigger the return of U.S. oil producers, should it strike a deal that drives oil prices higher. As crude prices have firmed, more rigs have come back on line — about 100 since early July in the U.S.
Stability in oil prices, especially toward $60, could bring back more of the U.S. shale industry. That would be a challenge to Saudi Arabia, which has ramped up output to a record level and is selling oil out of inventories.
The U.S. industry, the original target of OPEC when it switched to a market-based pricing strategy, could prove to be a deterrent for any freeze agreement. The U.S. is still swimming in oil, with a build of 2.5 million barrels a day in the last week. U.S. production is about 1 million barrels a day lower than last year, but imports have increased at the same tine.
"As the U.S. production surges again, what do the Saudis do? I think they thought about that enough not to let them fall into the trap of freezing or cutting production. Why would they subsidize it at that point?" Morse said.
Citigroup's base case is that U.S. crude supply could grow by 160,000 barrels a day year over year in 2017, but with big potential for upside.
Morse said OPEC nations are now producing at close to capacity. The Saudis are at 10.7 million barrels a day, Iran is closing in on to pre-sanction levels soon and Iraqi exports are expected to be capped due to constraints on the infrastructure. But Iraq is also reportedly asking energy companies to pump more, ahead of the September meeting.
Kilduff said a freeze would be ineffective since all the producers are close to capacity or have problems keeping them offline.
"It's like an aggressive antagonism," he said. "It's everybody for themselves, and against the shalers."
There are also Libya and Nigeria, suffering from outages but possibly able to bring some oil back on line. Then there's Venezuela, which is suffering from output declines after years of underinvestment.
Update: Clarifies when last OPEC meeting was held