Path from oil freeze to output cuts is unclear
Saudi Arabia said its accord with Russia to cap oil production was “the beginning of a process”, but the path from a freeze to the output cuts needed to eliminate a global surplus is far from clear.
When Saudi oil minister Ali Al Naimi suggested that the agreement in Doha was a prelude to “other steps”, he fanned hopes that the kingdom’s resistance to production cuts was finally weakening. Oil’s recovery from a 12year low last month was fuelled by speculation that major producers were finally building a coalition that could work to end the glut.
The problem with using a production freeze as the bedrock for deeper cooperation is that none of the parties involved have to make any effort to comply.
“The four producers involved are already producing close to their peak,” said Miswin Mahesh, an analyst at Barclays in London. “The freeze is the oil-market equivalent of calling for a ceasefire when they’re running out of ammo.”
The accord reached in the Qatari capital marks the first sign of cooperation between Opec and nonmembers that Saudi Arabia has said is necessary before it agrees to curb production.
The failure of previous attempts at coordination, such as when Russia offered to curtail supply in 2008 only to keep pumping, makes analysts doubtful this latest union will go ahead.
Al Naimi may clarify what to expect from the agreement when he gives a special address at the IHS CERAWeek conference in Houston on Tuesday. Nigeria, another member of the Organisation of Petroleum Exporting Countries, sup- ports an output cap but also backs giving Iran and Iraq room to regain lost market share, the African producer’s energy minister Emmanuel Kachikwu said in Doha on Sunday. He was scheduled to meet Al Naimi on Monday, according to a person familiar with the matter.
“Countries like Iran and Iraq have been out of the market for a while and if they are to come back, you shouldn’t freeze them out where they are, you should freeze them at a higher level,” Kachikwu said. “By June, we will come very close to tightening the market.”
Russian potential
As Russian deputy prime minister Arkady Dvorkovich acknowledged on February 16, complying with the output freeze is no great stretch for the world’s second-largest crude producer. Most companies won’t have to take any measures to comply and the nation’s output was already on track to remain stable this year after recent tax increases reduced the potential for growth, he said.
“Freezing production does not re- ally change our view on Russia supply for this year,” said Jeff Currie, Goldman Sachs Group’s New York-based head of commodities research. The nation’s output won’t grow any further after it reached 10.84 million barrels a day last month, the bank estimates.
Saudi Arabia already boosted out- put by about 500,000 barrels a day in the past year to near-record levels of more than 10 million barrels a day. While the Middle Eastern country has at least one million barrels a day of spare capacity, it probably doesn’t intend to tap the reserve, which is held back to cover market disruptions, said Harry Tchilin- guirian, head of commodity markets strategy at BNP Paribas.
Tentative step
For some observers, the RussiaSaudi detente is the first tentative step toward something bigger — the revival of Opec’s appetite for market management.
“Opec is not dead,” Olivier Jakob, managing director at consultants Petromatrix GmbH, said. “It’s back.”
Jakob described the freeze as an interim measure that will culminate in agreement on new production quotas at the group’s next meeting on June 2. The organisation’s last gathering ended with the abandonment of any limits on output as members focused on defending market share against rivals, both internal and external.
“This is a real, credible plan to get everyone on board,” said Yasser Elguindi, oil analyst at New Yorkbased consulting firm Medley Global Advisors. “If Iran at some point freezes, then this allows for a potential discussion of cuts if they are needed.” —