Members may offer Iran special terms
The world’s two largest crude oil producers, Russia and Saudi Arabia, announced that they would freeze their production at January levels along with several other OPEC members in an attempt to stabilize crude oil prices. While the news seems like a positive step toward lifting the price for crude oil, Iran remains a key obstacle to ensuring that production levels are brought in line with global demand.
Iran, which only recently rejoined global markets after the end of international sanctions on the country, remained insistent that it would increase its production in a bid to regain lost market share when it was under sanctions. While Iranian Oil Minister Bijan Zanganeh supported the production freeze, he did not indicate that Iran had any intentions of joining other OPEC members in capping production.
“This is the first step and other steps should also be taken,” said Zanganeh. “This cooperation between OPEC and non-OPEC members to stabilize the market is good news. We support any effort to stabilize the market and prices.”
While Zanganeh did not explicitly say Iran would not join the cuts, Iran’s OPEC envoy, Mehdi Asali, was more direct. “Asking Iran to freeze its oil production level is illogical … when Iran was under sanctions, some countries raised their output and they caused the drop in oil prices,” said Asali.
One alternative that is being considered inside OPEC is allowing an exemption for Iran to continue exporting more of its production in order to regain market share while other OPEC and non-OPEC members freeze current output.
Two non-Iranian sources close to the OPEC discussion said Iran might be offered special terms as part of an output freeze, reports Reuters. “Iran is returning to the market and needs to be given a special chance, but it also needs to make some calculations,” one of the sources said.
Commodities markets need an actual production cut, not a fake production freeze
Both Brent and WTI crude were showing positive gains today on the back of Iran’s support for a production freeze, and a 753 MBO draw on U.S. crude oil inventories, but what markets are hoping for is a cut in production, not a cap.
“A freeze is not the same as a cut, and somewhat disingenuously, keeping crude production at January levels actually implies higher-than-expected annual output … and [that] can hardly tackle the current market oversupply,” JBC Energy said in a note.
Many hope that this is simply the first step in what will eventually become a coordinated cut in global oil production, with the freeze acting as a bridge for future cooperation between Saudi Arabia and Russia, who are on opposing sides of the Syrian civil war. Saudi Arabia may also be suspicious of Russia cutting production after Moscow cheated on production cuts in 2001 between OPEC, Mexico, Norway and Russia.
The longer it takes for a price recovery to begin, the longer it will take for the market to come full circle, Vice President of Crude Logistics and Hedging at Continental Resources (ticker: CLR, ContRes.com) Kirk Kinnear told Oil & Gas 360®.
“Our studies indicate that the length of the decline is a pretty good indicator to the length of the price recovery,” said Kinnear. “Right now, we look to the summer of 2014 as the beginning of the decline, so you have at least 18 months if the price recovery started today before you see that reinvestment. It’s going to take a while.”
