Oil prices limped higher overnight in their ubiquitous carry-driven way, only to tumble quickly this morning as the reality that, as Goldman says "at record levels, this production freeze doesn't help at all") and clear indications from the meetings in Tehran that Iran will do 'whatever it takes' to increase its production to pre-sanctions levels. WTI is back below $30.
As Bloomberg notes,
Any output-freeze agreement among key oil producers is being dismissed out of hand by oil bears.
William Edwards, a Katy, Texas-based consultant, who has said since late 2014 prices will go low and stay low for years, says this latest proposal wouldn't even cut production, which he says must happen for price recovery.
"For OPEC, the sequence is as follows," Edwards tells WSJ. "It spends a year or two saying 'you cut," meaning everyone except OPEC. Then it'll spend another year or two saying 'We all should cut.' Finally, when prices are so low it has no choice, OPEC will say 'we've agreed to cut, starting in six months."
And as Goldman's Damien Courvalin warns, keeping output at record levels doesn't help...
Saudi Arabia, Russia, Qatar and Venezuela announced today, February 16, that they agreed to freeze oil production at their January level - if other producers committed as well. This would be the first coordinated production decision between OPEC and non-OPEC members in fifteen years, with Saudi Oil Minister Ali Al-Naimi stating that this was “beginning of a process” that could require “other steps to stabilize and improve the market”.
The details of this agreement suggest however that such a freeze will have little impact on the oil market as proposed, while there remains high uncertainty that it even materializes, in our view. As a result, our oil supply and demand estimates remain unchanged and we reiterate our view that oil prices will remain volatile but range bound in coming months until inventories stop building.
- The proposal to freeze production at January levels would keep OPEC and Russian output at 43.1 mb/d, using IEA January production levels (excluding Indonesia and OPEC NGLs). This would only be 115 kb/d lower than our annual average 2016 production forecasts, assuming Iran grows by 285 kb/d this year. As a result, the implementation of such an agreement would have no impact on our expected balances for the year and would leave the global surplus in place in 1H16. Implementation of such a deal would be further complicated by the uncertainty around production levels, with a wide range of estimates for January Iraqi production for example, ranging from 4.2 mb/d (OPEC) to 4.5 mb/d (Ministry). Further vessel tracking suggests that Iraqi exports have continued to rise so far in February.
- The freeze is conditional on other nations agreeing to participate, Russia’s Energy Ministry said in a statement. While Venezuela and Algeria have been championing such an agreement for some time, with Iraq also willing to join, the participation of Iran seems unlikely. Iran has continued to comment that it is committed to growing production and regaining market share, suggesting that any deal involving Iran would likely need to allow for some production growth. As an aside, we remain conservative on our Iranian production growth forecast given the only limited increase in exports achieved so far and the limitation that the remaining US sanctions (banning US equipment use in Iran) create in ramping up output.
- Support for such coordination has been most evident from n countries where output is already declining. In that respect, Russia’s participation is noteworthy. On the one hand, its participation may not imply a shift in stance as our Russian energy analyst, Geydar Mamedov, did not expect production to increase sequentially from January levels following the launch. On the other hand, the strain of low oil prices is visible at the government level with current prices raising the risk of a potential increase in oil taxation and in turn lower production. Should a change in taxes occur, with such a proposal considered by MinFin, this would be an incentive to have other countries limit output at the same time. Importantly though, the impact on Russian oil production would only occur once such policy passes which could be months away given the need for legislative changes in order to institute tax changes.
- While an agreement could create the perception that more could be achieved, such as production cuts, we believe this would not be sufficient to set a floor on prices as they will only stabilize once inventories stop building, which at current proposed output levels only occurs in 2H16. We illustrate this below with the oil price trajectory of 1998-99 when the first two OPEC cuts only provided shortterm support to prices as the market remained in surplus. Finally, the proposed freeze seems to be only for a short period, to help stabilize the market, allowing for production growth to resume once inventories stop building, likely in 2H.
More broadly, we remain of the view that a broader production cut would be selfdefeating given the short-cycle nature of shale production and the only nascent non-OPEC supply response to OPEC’s November 2014 decision to maximize longterm revenues. We think it would likely require a period of weak economic and oil demand growth to see a broader agreement to curtail production.
And now we get headlines from Tehran...confirming Iran would increase production and not listen to OPEC
#Iran refuses #Dohe's meeting proposal.
— Reza Zandi (@R_Zandi) February 17, 2016
Zangeneh in reaction to ?#Doha meeting stated just few words and just mentioned the report of Doha's meeting is now given to Iran
— Reza Zandi (@R_Zandi) February 17, 2016
But they tried to be friendlly...
Zangeneh Says in in a small press conference : "we support efforts by OPEC members to keep the prices stable."
— Reza Zandi (@R_Zandi) February 17, 2016
And this...
LIBYAN OPEC DELEGATE SAYS LIBYA WOULD LIKE TO PRODUCE ITS SHARE OF OPEC OUTPUT WHEN CONDITIONS IN THE COUNTRY IMPROVE
Good luck with that.