Doha agreement pre-empts an oil price collapse

Friday 26/02/2016
Saudi Arabia’s Oil Minister Ali al-Naimi speaks to the media in Doha, on February 16th.

Beirut - Oil prices nudged up on news from Doha that major Organisation of the Petroleum Export­ing Countries (OPEC) and non-OPEC producing states had agreed to freeze production at January’s level, averting a major price collapse.
Information from the Doha meeting indicated that some ma­jor producers, including OPEC’s Saudi Arabia, Venezuela and Qa­tar, along with non-OPEC Russia, had agreed to limit production to January levels. This agreement among adverse producers sent optimistic vibes through global oil markets.
The fact that the two major producers — Saudi Arabia and Russia — had come to an under­standing is a major breakthrough in the oil industry.
There are still hurdles to cross. The markets are well aware of the tasks to be resolved before a com­prehensive and credible agree­ment is finalised. What the Doha accord accomplished, however, is to stop the steep price deteriora­tion, even if temporarily, in which some producers were discounting prices to $20 per barrel.
The Doha accord met encour­agement but not full support. Af­ter the Doha meeting the Qatari and Venezuelan oil ministers trav­elled to Tehran to meet with Ira­nian and Iraqi oil ministers. There was no official statement from the Tehran meeting, a signal that no agreement was concluded.
The Iranian oil news agency Shana quoted Iranian Oil Minister Bijan Zanganeh as saying the Doha agreement was supported by Iran as an effort to stabilise the mar­kets. Zanganeh insisted, however, Iran still planned to increase pro­duction approximately 500,000 barrels per day (bpd) to reach pre-sanctions production levels.
Statements by Iranian officials spoke of an increase of around 1 million bpd overall in 2016. Market sources said it was more realistic for Tehran to increase production about 500,000 bpd of crude oil.
Iran also has the capacity to in­crease condensates (very light oil produced in association with natural gas) production by ap­proximately 400,000 bpd in the next few months. The Doha accord would not condensate production. OPEC refers only to incremental crude oil production.
Iraqi Oil Minister Adel Abdul Mahdi said he was tentatively encouraged by the Doha accord but did not lend his full support. Iraq’s January production level, according to official figures, was 4.3 million bpd. Mahdi has said Iraq planned to produce 4.4 mil­lion-4.5 million bpd in 2016.
The proposed Doha agreement follows record production by both Saudi Arabia and Russia in Janu­ary, with crude oil output of more than 10 million bpd each.
Iran and Iraq had been planning to ramp up crude oil production by around 500,000 bpd each dur­ing 2016.
The Doha talks brought together the two most important produc­ers, Riyadh and Moscow, and the Tehran meeting did not officially refuse the accord. These initial re­sults would encourage Venezuela to carry on its mediation, which started several months ago. Fur­ther negotiations are expected as announced by Venezuelan Presi­dent Nicolas Maduro.
Oil-producing countries’ econo­mies were hard hit in 2015. Major projects were either cancelled or postponed. There is rising aware­ness in these nations that an agreement is necessary to stop the price — and consequently their economies’ — collapse.
The Doha talks put negotiations on track. Markets will continue to be nervous until a major and cred­ible agreement is signed. Market observers are projecting a $50 per barrel by early next year, if an agreement is reached in 2016. Without an agreement, and with a record 500 million barrels of com­mercial storage available, prices would continue to dip.
The main difference that the Doha talks have made is in raising the possibility that a major agree­ment could come in the not very distant future.