Freeze agreement falls apart without Iran
Discussion between key OPEC and non-OPEC producers about freezing production at January levels has pushed oil prices up from below $30 per barrel to more than $40 ahead of yesterday’s fruitless meeting in Doha, Qatar.
Back in January, U.S. crude oil benchmark WTI fell to a 2016 low of $26.55 per barrel while international crude benchmark Brent reached $27.88, both on January 20, as supply continued to outpace demand. Last week, news of a production freeze brought prices back up to $42.17 and $44.69 for WTI and Brent, respectively, on April 12, just days before the anticipated Doha meeting.
Iran: “Nope”
The group of 18 oil producing countries was unable to come to an agreement over the weekend, however, sending prices down 5% in overnight trading. Saudi Arabia, OPEC’s largest producer, demanded changes to the draft production freeze agreement which would require all OPEC members to take part. Iran, which did not even send a delegate to the meeting, appears to have almost singlehandedly derailed the possibility of unanimous cooperation among the members of OPEC.
It looks to be another incarnation of the 1,355 year long pissing match between the forefathers of Saudi and Iran that American Thinker said is as old as Islam itself. “The Sunnis believed that Mohammed’s confidant Abu Bakr should succeed him, while the Shiites have insisted that Ali ibn Abi Taib, Mohammed’s son-in-law and cousin, should be the new leader of Islam. In A.D. 661, Ali was killed by a Sunni faction while at prayer in the Great Mosque of Kufa. Ali’s murder cemented the division between the Sunnis and Shiites.”
In 2016 the Islamic Republic saying repeatedly that it would not take part in a production freeze while it works on reestablishing its own share of global markets following the recent agreement to lift international sanctions that had been brought on by Iran’s nuclear program acceleration.
Tehran plans to continue increasing its oil production to pre-sanction levels of around 4 MMBOPD before it is willing to discuss a freeze. In March, the country produced 3.3 MMBOPD, according to secondary sources cited in OPEC’s April Oil Monthly Report.
“If this is going to be the starting shot of another price war, we have fireworks ahead,” Jan Stuart, global energy economist at Credit Suisse, told The Wall Street Journal. Saudi Arabia and Libya both have spare capacity that they could bring back to markets without an agreed-upon cap in production.
The growing disagreement between regional rivals Saudi Arabia and Iran could spell trouble for the upcoming OPEC meeting in June. Qatar Energy Minister Mohammed al-Sada said the OPEC members present over the weekend “concluded that we all need time for further consultation,” reports New York Times. “Participating countries [will] consult among themselves and with others,” until the next OPEC meeting in June, he added.
Chances of production freeze moving forward are shrinking
Following the end of discussions Sunday, Russian Energy Minister Alexander Novak said cooperation on oil production might be resumed, but that the odds of this happening were shrinking, reports TASS.
“Possibilities do exist. But as for reaching agreements, well, judging by today’s heated debates, taking into account Iran’s position, we will not be that optimistic about such agreements,” he said.
Oil prices recover quickly after disharmony in Doha
Oil prices are still down today following the news that no concrete deal was reached in Doha, but they have not initiated a deep-dive like some feared. Slowing production in the U.S., and a strike in Kuwait has lent strength to the market.
The strike in OPEC-member Kuwait may have taken more than 1.5 MMBOPD off line, reports CNBC.
Prior to this weekend, many analysts had called the deal meaningless as well. Most of the countries involved in the talks had little or no spare capacity to bring to the market to begin with, meaning a production freeze would leave their output near maximum levels.
“The initial post-Doha reaction will likely see an initial leg lower, but a sentiment-driven pullback should find support near the mid-$30 a barrel range… given an otherwise improving market balance,” said Helima Croft, head of commodity strategy at RBC Capital Markets.
