One of the most farcical instances of report-it-then-promptly-deny-it headline hockey since last summer’s Greek bailout drama has been the incessant barrage of “news” surrounding the oft-celebrated oil output freeze deal struck last month by the Saudis, Qatar, Venezuela, and Russia.
At the time, the market was hoping against hope for an agreement to cut production. After all, Russia and Saudi Arabia are pumping at record levels. As we put it at the time, “it was not exactly clear how ‘freezing’ output at a record level will ‘stabilize and improve’ the market.” Still, this market will take what it can get at this point and since the “agreement” on February 16, oil prices have indeed risen and some of the gains have – rightly or wrongly – been attributed to the “freeze.”
Casting a pall over the entire thing is Iran who, having just begun to ramp up production after the lifting of international sanctions, isn’t particularly excited about the prospect of taking its foot off the pedal. Asked about participating in the freeze, Oil Minister Bijan Zanganeh said last week that Tehran should “just be left alone,” until production reaches 4 million b/d. At that point, Zanganeh says, “we will join them.”
Of course that’s a non-starter for the likes of Kuwait, whose own oil minister Anas al-Saleh recently warned that his country will “go full power” if everyone (and “everyone” includes the Iranians) isn’t on board with the deal.
On Monday, Russian Energy Minister Alexander Novak spoke with Zanganeh on the phone and once the call was over, indicated that Moscow “understood” its ally in Tehran’s position. “Since Iran’s oil production decreased under sanctions, we totally understand Iran’s position to increase production and revive its share in the global oil markets,” Novak said, adding that “within the framework of major oil producers (OPEC and non- OPEC), Iran is liable to have an exclusive way for increasing its oil production.”
And increase production Iran will – by another 1 million b/d by 2017. “The positions of Russia about Iran’s return as well as resumption of stability to the oil market were encouraging and very positive,” Zanganeh said of Novak’s comments.
It’s thus clear that Iran will not be participating in any freeze and so, OPEC and non-OPEC producers are left to decide whether to move ahead with the deal or not.
On Wednesday, we get the latest possibly bogus news in the never-ending output freeze saga as Reuters reported that oil producers will meet in Doha on April 17 to discuss the deal. That report was “confirmed” around an hour later by Qatari Oil Minister Mohammed Al-Sada. Here are the key points from Qatar:
OPEC/Non-OPEC Freeze Likely to Be Implemented Without Iran’s Participation – Gulf OPEC Official
— Summer Said (@summer_said) March 16, 2016
“Oil producers including Gulf OPEC members support holding a meeting next month to discuss a deal to freeze output even without Iran,” Reuters wrote.
“It’s a setback but it will not necessarily change the positive atmosphere that has already started,” an OPEC source from a major producer said, referencing Iran’s refusal to participate.
“You can’t ignore all other oil producers. The meeting is likely to go ahead,” another source said, before saying that real, concrete progress on finalizing the details would be discussed. “We will not just meet for the sake of meeting.”
Well, we don’t know about that. OPEC meetings seem to always be “just for the sake of meeting,” ever since the group ceased to exist as a production-throttling cartel, but then again, it won’t just be OPEC in attendance. Besides, as Goldman’s Jeff Currie put it this morning on BBG TV, “it’s no sweat off their backs” if the Russians and the Saudis complete the agreement to freeze output given that Russia is pumping at a record and Riyadh has seen “flattening investment.”
“You can’t operate a cartel the way you used to” because U.S. shale supply can fill the gap if producers cut,” Currie added, before restating Goldman’s view that temporary spikes in the price of oil ultimately are not currently sustainable. “The market can’t trade higher until we finish that re-balancing process.” As a reminder, here’s what Currie said earlier this month:
The lack of a supply response in 2015 has shifted over the past two months into consensus expectations for broad based supply declines in 2016. This adjustment is only starting however and sustained low prices are necessary in our view to maintain a sufficient level of financial stress to finish this rebalancing process. This is why an early rally in oil prices before a real deficit materializes would prove self-defeating in our view, as it would reverse these nascent supply curtailments.
Given current supply dynamics – i.e. overflowing storage – and the very real possibility that lackluster demand from EM (and especially Latin America) could further dent the fundamental picture, we somehow doubt that even if producers do manage to agree on and implement a freeze that things will change materially for prices. Indeed, given Iran’s determination to add an additional 1 million b/d of supply to an already glutted oil market, it’s still difficult to understand how “let’s freeze things at a record rate” is a viable way to permanently alleviate downside pressure.
For now, the headlines are good enough (for some algos at least) – as oil is up on the “news.”
As for the previously belligerent Kuwait, it looks like they’re coming around after all:
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