Oil price surges as OPEC brings bulls back into market

Oil prices surged dramatically in the last two weeks thanks to OPEC freeze talk, but there's little expectation the cartel will act, especially now that crude is trading 24 percent higher just on hot air.

Oil, up nearly 9 percent this week alone, has raced higher since West Texas Intermediate crude futures dipped below $40 per barrel in early August. In just 16 days, oil futures are approaching $50 - settling at $48.52 per barrel Friday.

While analysts say oil could back off its highs, there's a more bullish tone to the market. Investors are building new long positions, offsetting a major short position, which has been whittled away from record levels by short covering.

"These elevated prices may last a bit just because the market has given so much reward to the rhetoric right now," said John Kilduff of Again Capital. OPEC on Aug. 8 said it would meet on the sidelines of an energy conference in Algiers in late September, which will also be attended by non-OPEC producers.

OPEC's biggest producer Saudi Arabia last week confirmed it was on board with discussing actions if prices remain low, and that gave much more credibility to the talks. Since the Saudis officially joined in, oil has risen more than 15 percent. It was Saudi Arabia that pushed the OPEC strategy of letting the market set prices. That resulted in a steep decline in oil — to lows in the $20s last winter — as producers kept pumping, adding to a giant global oil glut.

Analysts see little chance an agreement could be reached to freeze production or take other action. OPEC and major non-OPEC producer Russia failed to reach agreement on freezing production levels in the past, and an April meeting in Doha broke up with no resolution.

The disagreement that led to failure then still exists. Saudi Arabia declined to agree unless all producers agreed to freeze, but Iran said it would not hold back production, since it is still in the process of returning to the output levels it had before it was sanctioned for its nuclear program.

"I think the OPEC rumors are a side show to what's really going on within OPEC, between Saudi Arabia and Iran. I think tensions remain extremely high. Iran has not reached its peak production level. I think it's still about 200,000 barrels away," said Michael Cohen, head of Barclays' energy commodities research.

Cohen said oil prices could be subject to macro events in the next several weeks, including the Fed's September meeting. Barclays' economists are among a minority on Wall Street who believe the Fed will hike rates at that meeting. If it does, the dollar would rally and that could dampen the oil rally, Cohen said.

"I think [OPEC] is concerned about prices going below the $45 range. Clearly when WTI and Brent went below that range, and go close to $40, it pays to talk. It worked in April, and it's no skin off their back," he said.

Cohen expects third-quarter prices to average below second-quarter prices. "We don't think they can stay here during this quarter, because we're in the midst of a shoulder season and the fundamentals are that inventories are still high and supply is not adjusting fast enough. For Q4, we think a $50 price by then is justified. We could see mid $50s or even $60 by the end of the year," he said. His $50 forecast is for Brent in the fourth quarter, and it's $49 for WTI.

If prices fall, it remains to be seen whether OPEC would act or just try more talk to pump up prices.