On 17 April, OPEC and Russia along with several other non-OPEC producers met in Doha to discuss a potential freeze in oil production with the aim to stabilise the oil price. Iran was not in attendance and after a day of prolonged discussions over a draft version of a potential agreement, at the end of the day, it was announced a production freeze had not been agreed.
Even if an output freeze had been announced, it would not have been a genuine one in 2016. Iran had already declared it will not consider a freeze until it has returned to pre-sanction levels which isn't likely until 2017. With Iran ramping up output this year, Saudi Arabia has said it does not want to accept a hold at January levels on its own production unless all OPEC members, such as Iran, are also in agreement. These two stances were what prevented even a window dressing of an agreement emerging from the April 17 Qatar agreement.
A number of countries represented at the meeting reported production at near record levels for January 2016. Russian oil and condensate production reached a post-Soviet peak of 10.9 million barrels per day.
At first, Russia showed little interest to participate in an international initiative to freeze or cut oil production. With 80% of Russian oil output profitable at $20/bbl or below, they did not have the necessary motivation. This changed when the Urals oil price dropped below $25/bbl in January, prompting Russia to take the lead in coordinating oil producing nations to tackle oversupply.
Russia’s key goal of this initiative to stabilise oil prices, preventing another drop to US$25/bbl or lower is already a partial success. However, to balance the shortfall in the 2016 budget, Russia will not be able to rely purely on a recovery in prices. Further budget cuts, taxation increases or support from its emergency funds will need to be strongly considered alongside this.
Additionally, the Iraq government has reported January crude oil production at a record high, of around 4.5 million b/d. Whilst Iraq agrees with the sentiment of a plan to stabilise oil prices, it is still looking to grow output, and like Saudi Arabia, Iraq would not want to cede market share built up following the rebuilding of its oil industry.
Iran is ruling out a production freeze since its production was kept low for years under sanctions. The EU oil embargo and US crude oil export cap forced the country to cut production by 1 million b/d between mid-2012 and January 2016. In this period, it lost market share against Saudi Arabia and Iraq, which together increased production by 3.4 million b/d.
Determined to regain its previous market share, Iran’s oil production has already increased by 375,000 b/d since sanctions were lifted on 18 January. However, as we expected, this is less than the 500,000 b/d the country was planning to ship post-sanctions. Iran’s production ramp-up is linked to how quickly it is able to increase exports, and the country is encountering payment and insurance issues as a result of the US decision to keep its primary sanctions in place.
The discussion of a possible production freeze, which has been going on since early February, has already helped support oil prices. The low of $26 thus far this year for Brent, was set on 20 January 2016 and prices have strengthened to just above $40 per barrel, with much of that strong increase in price due to the possibility of an OPEC freeze.
We will be monitoring the meeting in Doha closely and following with more insight on the implications of a price freeze, including an in depth view on how Iran’s new production will impact the market.
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