Last night when previewing today's main event, the "secret" meeting between the Saudi and Russian oil ministers, we explicitly said this deal would not "lead to a cut in production", and sure enough just two hours ago the meeting between the two oil superpowers concluded and as expected the two failed to agree to any production cut; instead what they did agree on was to "freeze" production at January's already record levels, and furthermore make the agreement contingent on other OPEC members complying, something Iran has already said it would not agree to.
- SAUDI OIL MINISTER SAYS AGREED TO FREEZE OIL PRODUCTION
- OIL PRODUCTION FREEZE CONTINGENT ON OTHERS FOLLOWING: QATAR
Here is Reuters' take:
Top oil exporters Russia and Saudi Arabia agreed on Tuesday to freeze output levels but said the deal was contingent on other producers joining in - a major sticking point with Iran absent from the talks and determined to raise production.
The Saudi, Russian, Qatari and Venezuelan oil ministers announced the proposal after a previously undisclosed meeting in Doha - their highest-level discussion in months on joint action to tackle a growing oversupply of crude and help prices recover from their lowest levels in more than a decade.
The Saudi minister, Ali al-Naimi, said freezing production at January levels - near record highs - was an adequate measure and he hoped other producers would adopt the plan. Venezuela's Oil Minister Eulogio Del Pino said more talks would take place with Iran and Iraq on Wednesday in Tehran.
"The reason we agreed to a potential freeze of production is simple: it is the beginning of a process which we will assess in the next few months and decide if we need other steps to stabilize and improve the market," Naimi told reporters.
"We don't want significant gyrations in prices, we don't want reduction in supply, we want to meet demand, we want a stable oil price. We have to take a step at a time," he said.
It was not exactly clear how "freezing" output at a record level will "stabilize and improve" the market but we will cross that bridge in a few months.
So what does the deal really mean?
As Bloomberg's Julian Lee explains, "it’s hard to see big reduction to global crude glut after world’s biggest producers, Saudi Arabia and Russia, agreed to freeze output at last month’s levels."
In fact, it is hard to see any reduction in the glut because both nations are already pumping near record levels and the deal depends on other cash-strapped producers making similar commitments:
- Saudi Arabia produced 10.2 million B/D in Jan., the highest January level since 1981, according to historical data from Centre for Global Energy Studies
- Russian output was a post-Soviet record 10.88m b/d in Jan.
Also, the Russian offer to freeze output comes at time when growth from new fields is waning anyway; IEA expects Russian output to fall 160k b/d over course of 2016; In other words, the two nations "agreeed" to keep pumping at a record pace and logistical considerations may force Russia to reduce production in any event.
Lee adds that the market needed an unlikely pledge between the the nations to cut supplies, rather than freeze them, in order to extend recent rally, curb oversupply. This has not happened
Then there is the question of contingency: If others do participate, the acid test for the output freeze and its impact on supply may come in summer when Saudi production normally rises to meet higher domestic demand.
Summarizing the above is Global Risk Management oil risk manager Michael Poulsen who said that "the odds of a supply cut was slim-to-none, but that slim chance was priced in. What we saw is no production cut, just freezing of levels in January when producers were producing as much as possible - so everyone will continue to produce as much as they can for the foreseeable future. Effectively, they have agreed to continue producing at maximum capacity."
Worse, the non-deal appears dead in the water before it was even announced as it is practically impossible to get support for the deal from other OPEC nations such as Iran, Iraq or Libya for following reasons:
- Iran is raising production following easing of sanctions
- Iraq is rebuilding industry after decades of war, sanctions
- Libyan production hampered by unrest in country, output will be restored when possible
In fact, Bloomberg already added that Iran will seek to regain market share to pre-sanctions level, regardless of price, quoting a person with direct knowledge of country’s plans.
- IRAN SAID TO KEEP BOOSTING OIL MARKET SHARE AFTER ACCORD
The Iranian source said that producers responsible for present prices should cut their production to Dec. 2014 level, person says, which clearly is not going to happen.
It also means that with the contingent deal already having one non-compliant OPEC member, the entire deal was nothing more than a farce to top all those relentless oil production cut headlines.
The good news is that the relentless crude short squeezes on randomly flashing headlines about imminent "OPEC oil production cuts" will go away, if only for a few weeks.
Meanwhile, as we said last night, the market can focus on the real underlying dynamics: not only excess supply but clearly slowing global demand...
... and U.S. oil land storage, which as we and the market have been warning, is about to overflow. This perhaps explains why after surging in the aftermath of the headlines from the non-deal hitting the tape, WTI is back under $30. As attention now shifts to nearly full land storage, an oil price in the teens could be next because as BMI Research writes, the risk of a price collapse into the $10-$20/bbl range is mounting as the drop in U.S. crude demand may outpace production declines. Change "may" to "will", and the next big catalyst on the oil horizon becomes apparent.