Saudi Arabia, Russia, Venezuela and Qatar agree on oil production freeze
London - Oil ministers from Saudi Arabia, Russia, Venezuela and Qatar announced an agreement to freeze their oil output levels provided other major producers follow suit.
The deal would keep Saudi and Russian production at the record rates reported in January but is unlikely to be accepted by Iran in its current form since the country escaped from international economic sanctions only in January.
The agreement depends on adherence from other oil producers and is unambitious — freezing rather than cutting production — which has led to questions as to its importance.
However, experience suggests production agreements are normally reached in stages, often after earlier attempts failed or were partially fruitful.
Successful agreements often exploit the temporary weakness of specific producing countries and at least some past participants have reserved the right to increase output beyond agreed levels in the future.
Successful production agreements are usually of limited scope and duration, deferring more complicated and intractable issues about production allocations for later. In that sense, the production freeze announced in Doha on February 16th could be seen as a stepping stone towards a more ambitious and comprehensive deal.
The depth and duration of the price slump have taken producers by surprise and are inflicting intense pain on oil companies and exporting countries.
The Organisation of the Petroleum Exporting Countries’ (OPEC) original strategy of maintaining high production envisioned a modest and brief drop in prices that would quickly curb output from US shale formations and other high-cost producers and then restore the organisation’s market share.
The strategy may be working, with reports of a downturn in US shale output and a sharp drop in non-OPEC exploration and production spending. However, the strategy has proved far slower and costlier than thought when prices started to slide in 2014.
There are still doubts about how quickly the market will rebalance and whether prices will recover, with observers predicting no rebalancing until the second half of 2016, 2017 or even 2018.
OPEC’s strategy has inflicted a “good sweating” on the oil market but also on members of OPEC. The good sweating has made many OPEC and non-OPEC producers more flexible and amenable to the idea of a production agreement, at least in principle.
There is a strong incentive to declare the current strategy a success — and then quietly modify it. Key oil producers have already travelled some distance along this path.
Saudi Arabia and its close allies the United Arab Emirates and Kuwait have stressed in recent weeks that the strategy is working and that they can weather the downturn but indicated greater openness to production cuts in future.
Russia also signalled it might be prepared to join in any eventual production agreement in some unspecified way.
Venezuela, one of the hardest-hit producers, has been marshalling support for a modest production-freezing agreement, culminating in the Doha deal.
If most countries have sent mixed signals about their willingness to reach a deal, that reflects sound negotiating strategy as well as the extent of the remaining disagreements. Until now, no country wanted to be the first to make a concrete production-limiting offer for fear of weakening its negotiating position.
The Doha deal is incomplete in that it relies on concessions by other countries that were not party to the agreement and may not restrict output enough to restore market balance.
Its significance is that it indicated at least a subset of the most important oil-exporting countries that may be ready to do a deal.
Tehran will probably reject the deal in its current form (as might Baghdad) since it would constrain Iran’s output at an unacceptably low sanctions-era level.
From a Saudi perspective, one of the deal’s attractions is that it shifts some of the responsibility for continued overproduction and price weakness to arch-rival Iran.
The focus will now move to Tehran and away from Riyadh and Moscow, which is exactly what the Russian and Saudi negotiators want.
The form of Iran’s rejection is what matters. Iran could reject the deal outright and announce it will maximise its production unilaterally. Or Iran could accept “voluntary” limits on its production in the short term while announcing its intention to increase output later.
Uncertainty about just how much Iran can actually produce once freed from sanctions is one reason Saudi Arabia and its allies have wanted to defer any talk of production cuts until mid-2016. (Reuters)