Oil freeze: what you need to know

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Published Apr 15, 2016

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London - Nations representing almost 60 percent of the world’s oil production will gather in Doha on April 17 to discuss freezing their output at January levels in an effort to stabilise prices. Russia, Saudi Arabia, Qatar and Venezuela made a preliminary deal in February and are seeking to add more producers and extend the recent price recovery.

Who’s going?

In addition to the four signatories to the preliminary deal, Algeria, Angola, Azerbaijan, Colombia, Ecuador, Indonesia, Iraq, Kazakhstan, Kuwait, Mexico, Nigeria, Oman and the United Arab Emirates will attend. Iran hasn’t yet confirmed if it will go.

Who’s not attending?

Some of the world’s biggest producers including the US, Canada, China, Brazil and Norway won’t be showing up. Among the 13 nations in the Organisation of Petroleum Exporting Countries, only Libya - whose output is crippled by conflict - has ruled out going to Doha. The biggest question mark hangs over Iran, which has insisted it won’t constrain production before restoring pre-sanctions output. Oil Minister Bijan Namdar Zanganeh hasn’t decided whether he’ll attend.

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How likely is an agreement?

Forty traders and analysts surveyed by Bloomberg this week were evenly split on whether there will be a deal. While Russia’s Energy Ministry is “optimistic” and Qatar’s has a “positive feeling,” Saudi Arabia has said it will only cap its output if Iran follows suit - a notion Tehran has dismissed as “ ridiculous.”

What impact would a freeze have on oil prices?

Crude has rallied more than 30 percent to above $40 a barrel since the preliminary freeze accord in mid-February prompted a shift in market sentiment. A final accord could lock that gain in place, or even extend it to $50, said Bank of America. Yet a freeze will do little to mop up the glut because Saudi Arabia and Russia - the world’s biggest crude producers - are already pumping near record levels. Morgan Stanley said “our downbeat oil view is unchanged” by the prospects of a freeze.

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How much oil supply is at stake?

Producers that have confirmed they will consider joining the freeze produce about 47 million barrels a day of crude. Many of those nations were already pumping flat out in January, with little scope for increasing output. Russia and Saudi Arabia both held production steady this year, even before a final agreement to freeze.

Production from the 11 members of OPEC that are backing the agreement is already almost half a million barrels a day lower than January.

Would the freeze make a difference?

With most Doha participants already expected to keep output steady, much more important for the oil market will be what happens in the US and Iran. Declining shale oil production is expected to make up the lion’s share of the 710 000 barrel-a-day reduction in output from non-OPEC countries this year, according to the IEA. Iran plans to increase production by about 700 000 barrels a day this year from the 3.3 million pumped in March.

Read also:  Oil: Saudi Arabia will freeze production if Iran joins

What would the accord mean for US producers?

Any deal that pushed up prices would be “self-defeating” because it would allow a revival of drilling by U.S. shale producers, who can return to work at $55 a barrel, according to Goldman Sachs Group Inc. That would only postpone the supply curbs analysts say are needed to re-balance overloaded global markets.

How would the freeze be monitored and enforced?

During previous supply cuts, OPEC monitored members’ compliance using data on their production provided by external sources such as news agencies and tanker-trackers. It has no mechanism to punish countries that flout their limits and members habitually exceeded the group’s quotas, before production targets were effectively abandoned in December.

What happened when OPEC last made a deal with non-members?

OPEC has grounds to doubt the sincerity of its partners. The last time it struck a deal with rival suppliers was in late 2001, when Russia, Mexico, Oman, Angola and Norway promised to cut supply by 500,000 barrels a day.

Yet by the middle of the following year, Russia had actually increased output and the only production declines were in Mexico and Norway.

What if there’s no deal?

With expectations growing over the past week, oil traders embarked on a buying spree that pushed crude to a four-month high. If ministers fail to reach an accord, prices will see a “severe negative impact,” Citigroup predicts. OPEC’s refusal to cut output in 2014 prompted calls to write the group’s obituary, and an inability to finalise the freeze might see those epitaphs being carved. The ensuing disappointment could drag prices down to $30 a barrel, said Saxo Bank.

BLOOMBERG

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