Oil out­put freeze has a catch: At­tract­ing OPEC unity

The Pak Banker - - OPINION - Stan­ley Reed

AS prices have dropped ever lower, smaller oil pro­duc­ing na­tions on pre­car­i­ous fi­nan­cial ground have reg­u­larly pushed their big­ger brethren to stop pump­ing at record lev­els and help calm the mar­kets. Now, even the gi­ants are join­ing the cho­rus, with Saudi Ara­bia and Rus­sia on Tues­day call­ing for a co­or­di­nated ef­fort to freeze pro­duc­tion. The plan, which also in­cluded Venezuela and Qatar, is a ten­ta­tive sign that ma­jor oil pro­duc­ers are ready to co­op­er­ate. And it in­di­cates how deeply prices have fallen, as Rus­sia and Saudi Ara­bia have pre­vi­ously re­sisted tem­per­ing pro­duc­tion. But whether the plan ac­tu­ally goes any­where - or is just chat­ter meant to bol­ster prices - is an open de­bate. The four coun­tries said they would pro­ceed only if oth­ers com­mit. It is not an easy sell. Iraq has a long­stand­ing pol­icy of seek­ing to raise pro­duc­tion re­gard­less of the price-sta­bi­liz­ing poli­cies of the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries, to which it be­longs. And Iran has staked out a pol­icy of in­creas­ing oil ex­ports now that sanc­tions have been lifted as part of its "It throws the ball in Iran's court, be­cause they have said their out­put is go­ing to in­crease," said Bhushan Bahree, an oil an­a­lyst at IHS, a re­search firm in Wash­ing­ton.

The mar­kets have lit­tle con­fi­dence in the plan. Brent Crude oil prices ini­tially surged above $35.50 a bar­rel on dis­cus­sion of a deal. But the de­tails prompted a drop in prices below $33. "The mar­ket does not need a freeze. It needs a re­duc­tion," said Michael Lynch, pres­i­dent of Strate­gic En­ergy and Eco­nomic Re­search in Mas­sachusetts. "They are not of­fer­ing any­thing like that." He added that the plan an­nounced on Tues­day was in the early stages. "Peo­ple are talk­ing and ad­mit­ting to con­cerns about price lev­els," he said. Even a spec­u­la­tive deal rep­re­sents a step for­ward, al­beit a some­what sym­bolic one. For months, the mar­ket chat­ter fo­cused on the pos­si­bil­ity of pro­duc­tion cuts. But coun­tries are gen­er­ally less will­ing to cut, be­cause do­ing so means giv­ing up mar­ket share for their oil, which might be hard to win back. By hold­ing steady, pro­duc­ers can help ease the pres­sure on the mar­kets with­out mak­ing dif­fi­cult de­ci­sions. Saudi Ara­bia, which has kept pro­duc­tion at near record lev­els, can­not pump much more. Venezuela and Qatar have al­ready been main­tain­ing. Rus­sia in Jan­uary, the month cho­sen as the high­wa­ter mark for out­put, pro­duced oil at a post-Soviet record of 10.88 mil­lion bar­rels a day. Main­tain­ing this gusher through the year, far from lim­it­ing sup­ply on the global mar­ket, would al­low Rus­sian oil com­pa­nies to pump more this year than last. "It doesn't cost them much," said Il­dar Davlet­shin, oil and gas an­a­lyst at Re­nais­sance Cap­i­tal, a Rus­sian in­vest­ment bank. For Rus­sia, "this deal only means main­tain­ing the sta­tus quo." The plan, even at this early stage, is a change of tack for Saudi Ara­bia. As oil prices have slumped, the coun­try, the de facto leader of OPEC, has de­clined to cut its own pro­duc­tion to try to man­age the mar­kets.

It is also sym­bolic that Saudi Ara­bia and Rus­sia are now pre­sent­ing a united front on oil. The two coun­tries are geopo­lit­i­cal ri­vals, back­ing op­po­site sides in the Syr­ian civil war. And Rus­sia, which is not an OPEC mem­ber, has his­tor­i­cally re­sisted any bind­ing co­or­di­na­tion with the car­tel to bol­ster global oil prices. The rare co­op­er­a­tion re­flects the ex­treme weak­ness in oil, with prices fall­ing about 70 per­cent in the last 18 months. Venezuela - and other smaller pro­duc­ers that felt the pain early - has been es­pe­cially vo­cal about man­ag­ing pro­duc­tion. The coun­try's econ­omy, which is crit­i­cally linked to oil prices, is in dis­ar­ray, and its lead­er­ship has lit­tle fi­nan­cial backup. Now, the big­gest play­ers feel the need to do some­thing about pro­duc­tion, or at least talk about it. Al­though Saudi Ara­bia still has more than $600 bil­lion in fi­nan­cial re­serves, the low price of oil has pushed it to make bud­get­cut­ting moves like rais­ing the price of gaso­line, elec­tric­ity and wa­ter. Its govern­ment is also con­sid­er­ing rais­ing money through the sales of as­sets like air­ports and, pos­si­bly, a stake in the na­tional oil com­pany, Saudi Aramco. In Rus­sia, oil and nat­u­ral gas taxes make up about 50 per­cent of the fed­eral bud­get. And Pres­i­dent Vladimir V. Putin of Rus­sia de­pends deeply on oil, to pay the pub­lic sec­tor salaries and pen­sions that un­der­pin his pop­u­lar­ity. It also helps Mr. Putin keep up the army that gives Rus­sia its geopo­lit­i­cal mus­cle. The next step in the process will be ral­ly­ing sup­port. The Venezue­lan and Qatari oil min­is­ters will meet with their coun­ter­parts in Iran and Iraq. They will also visit non-OPEC pro­duc­ers like Oman, Kaza­khstan and Azer­bai­jan. As­sum­ing all are on board, the oil glut could be­gin to ease, par­tic­u­larly with Amer­i­can out­put on the de­cline.

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