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Inside The Doha Oil Freeze Deal: 4 Key Questions

By Ellen R. Wald, Ph.D.CommoditiesApr 11, 2016 12:53AM ET
www.investing.com/analysis/oil-'freeze':-inside-the-art-of-an-opec-deal,-doha-edition-200124578
Inside The Doha Oil Freeze Deal: 4 Key Questions
By Ellen R. Wald, Ph.D.   |  Apr 11, 2016 12:53AM ET
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Editor's Note: Desktop users - After reading the article below, please take a few additional minutes to participate in the survey at the end of this post.

It appears that on Sunday, April 17, the long-awaited oil production “freeze” meeting in Doha, Qatar between some OPEC and some non-OPEC oil producers will finally take place. The idea is that the big exporting countries – Saudi Arabia, Iraq, Russia, Venezuela, Iran, Kuwait, etc. – will meet harmoniously and all agree to not increase the amount of oil they produce above the rate at which they produced in January 2016. In other words, for the term of the agreement or the foreseeable future, the agreeing countries would not produce at a rate greater than they did that month.

Ideally, this agreement will provide some measure of stability to the oil market. Recently this market has seen supply rise without a corresponding rise in demand, but a Doha agreement could set a price floor around $40/barrel – at least that is what many hope. In reality, however, the freeze agreement (if it actually happens) will likely only provide a speculative bump rather than longer term price stability, particularly because a) it is only a freeze and not a cut, and b) this agreement will not be universally accepted amongst all producers

These are the countries that bring the most intrigue to a potential deal:

1. Can Russia be trusted?

Can Russia be trusted to keep a production freeze promise? Trust is a tricky issue when it comes to agreements between OPEC and non-OPEC producers. Russia is currently the top oil producer in the world and its faithfulness to a production freeze is most important.

However, Russia has a history of backing out of oil production agreements with OPEC. Yet there is some reason for OPEC to trust Russia this time. Recent reports have indicated that Russia’s Soviet era oil fields are in decline and that its production infrastructure desperately needs upgrading. This could indicate that Russia will go along with a production freeze out of physical necessity and as an excuse to cut production without admitting its infrastructure limitations.

Russia produced 10.91 million barrels of oil a day in March – its highest output in 30 years and only slightly more than it did in January. Just recently the Russian Energy Minister declared that Russian oil exports would grow in 2016, which is technically possible even with a freeze at January production levels. Russia could commit to the freeze and still produce record amounts of oil at the top of its capacity.

2. Will Iran’s refusal to participate scuttle the deal?

Iran is resolute in its commitment to accelerate its oil production back to pre-sanctions production levels and possibly beyond. For political reasons, President Rouhani’s government must remain committed to producing and exporting more oil, whether or not Iran’s decaying oil infrastructure can support these production increases.

No matter how much pressure Saudi Arabia—or any other country—puts on Iran at Doha, the government will not give in. This means Saudi Arabia, Russia, and the others must ultimately decide if they will go ahead with the deal regardless of Iran. Mohammad bin Salman, Saudi Arabia’s Deputy Crown Prince, indicated recently that his country would not. “If there is anyone [namely Iran] that decides to raise their production, then we will not reject any opportunity that knocks on our door,” he said.

On the other hand, Saudi Arabia has other ways of preventing Iran from bringing its oil to the market, such as blocking Iran from using SUMED (a pipeline from the Middle East to Europe). Saudi Arabia can also complicate Iranian maritime shipments of oil without formally blockading, because they regularly benefit from access to Saudi and Bahraini ports. Perhaps the Saudis believe that because of their own efforts or because of Iran’s dilapidated infrastructure, Iran will not be able to increase oil exports in a meaningful way so Iran’s participation in an agreement is essentially irrelevant.

Alternatively, perhaps the Saudis know a freeze agreement will prove meaningless when it comes to pricing but are using Doha as a way to shift the responsibility for sub-$40 oil from themselves to Iran. In either of those two situations, Saudi Arabia would be incentivized to agree to a deal.

3. Where do Libya, Iraq, and Venezuela stand?

Libya is also staunchly opposed to a production freeze, but since Qaddafi was overthrown, Libya’s government has been weak and unable to mandate the day-to-day production of oil. There is no central authority in Libya to limit (or increase) production at this time.

Even if Libya did agree to a production freeze, its word would be worthless because the government does not have effective control over the facilities. However, it is unlikely that Libya as a nation would be able to increase oil production in any meaningful way given the degree of devastation and instability the country faces.

Several months ago Iraq came out against a production freeze but recently changed its mind. On the other hand, Iraqi oil exports recently rose, again raising doubts about Iraq’s stance.

Venezuela is probably the most eager for any bump in prices that an oil freeze could provide. Despite its massive oil reserves (currently the world’s largest), the country is heading towards bankruptcy, and the government cannot afford to keep the lights on, let alone pump more oil. Since Venezuela cannot afford to pump more oil, it will advocate for any chance to raise the current oil prices at the current production rates, and a Doha deal might be their best hope for now.

4. What about the United States and Canada?

Neither the United States nor Canada can even consider participating in an oil production freeze agreement. Central authorities do not control the daily production of oil in these countries. Moreover, the individual companies are prohibited by law from colluding even if they wanted to.

Now that companies can export crude oil produced in the United States, there is nothing but logistics to stop these producers from filling any supply gaps that occur under the freeze agreement if they choose to do so. The countries meeting in Doha may be counting on the logistics to interfere, or they may think a speculative spike will happen even if North American oil producers fill gaps.

Under these circumstances, is an agreement to freeze oil production really worth anything? The market will continue to be oversupplied and any small gaps in supply can be filled by non-participating nations. If an oil production freeze agreement emerges from this Doha meeting, (which is not a guarantee) its value will likely be limited to a speculative jump. Those paying attention to the fundamentals, however, will realize that this agreement will not bind any producer to anything it did not already want to do

Reader Survey

Given the considerations listed above, is an oil production freeze agreement really worth anything? And if promises are made at the Doha meeting can any of the participants actually be trusted to comply for either the short or long-term? Please respond in the comments.

Inside The Doha Oil Freeze Deal: 4 Key Questions
 

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Inside The Doha Oil Freeze Deal: 4 Key Questions

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Roger in Vancouver
Roger in Vancouver Apr 16, 2016 12:24PM ET
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It's all about influencing market sentiment. If the Doha meeting participants just appear in public and maintain an image of unity, crude spot prices will rise above $40 despite fundamentals.
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Robert Leithiser
Robert Leithiser Apr 14, 2016 2:02AM ET
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It seems that a lot of the so-called uptick in demand is actually due to China increasing storage capacity and bringing local refineries ("teapots") online - as that gets saturated, another price shock is likely. A freeze does nothing as several have already pointed out for a couple of reasons - 1) It will not slow down Iran or US or Canada, so the demand situation will not improve, 2) Demand is weakening due to slowing global economy. I think another shakeout down to the high 20s will likely be the final bottom.
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Agathon Maximus
Agathon Maximus Apr 12, 2016 4:17PM ET
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1. The big money has gone long in the Oil Futures since the bottom, trying to push it up. Psychology & Manipulation. .2. The sellers jawbone (as mentioned in the comments) in order to benefit themselves. More P&M. .3. Loosens the telltale of deflation for CBs. More P&M. .4. Perfect setup for traders. More hot air for stocks. .5. The public & the peanut gallery concentrate on politics of it. Distraction. More P&M.
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Chandrakant Shah
Chandrakant Shah Apr 12, 2016 3:13PM ET
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This kind of initiative (production freeze) distorts market pricing, and helps in artificially propping up prices in the short term. Curtailing supply in a situation of low or stagnant demand will not yield results on a sustainable basis. These very participants will soon breach the agreement as they will be lured to cash in on the higher prices, and once one participant does that, everybody else will follow that, resulting in competition to come to the fore, and thus prices would again be determined by factors of pure demand and supply. All this is nothing but an eyewash.
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demis iliadis
demis iliadis Apr 12, 2016 9:59AM ET
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i think we are missing the key in this discussion! The question to ask if you filter out the volatility noise is: does the current price of oil reflects supply-demand equilibrium? I think at the level of ~$45 it does. Of course there will be spikes in both directions. But it is fair to say that overall: market participants are neither unhappy nor very excited at the $45 price level, a fair compromise for everyone.
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sally farmer
sally farmer Apr 11, 2016 10:31AM ET
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Hardly matters, if the market believes it and it does the price is going up as we can see..
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Brad Smith
Brad Smith Apr 11, 2016 10:31AM ET
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The market has been overreacting to the slightest positive news on oil for a long time now. When a Russian minister mentions they are planning to discuss production decreases with OPEC in an effort to support falling prices, the market knee-jerks sharply to the bullish side. This corrects a bit when the nothing substantial actually happens but usually not as much as the increase. Oil price might be going up, but it is going up on hot air that will not last in the longer term spectrum.
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Alexander Ayzenband
Alexander Ayzenband Apr 11, 2016 8:55AM ET
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Very nice article and the summary. This agreement isn't likely be worth anything, I agree. Oversupply is the new norm.
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Venkata Srinivas Nagulakonda
Venkata Srinivas Nagulakonda Apr 11, 2016 8:54AM ET
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Can't Trust the "Freeze Agreement" due to the Countries Deficit Budget
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Samir Youssef
Samir Youssef Apr 11, 2016 8:45AM ET
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It is in the interest of these countries to work as a team to achieve their targets, otherwise they will end up selling more oil for less revenues. Only future will tell.
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ChiLL BuLL
ChiLL BuLL Apr 11, 2016 8:22AM ET
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trusted? its politics and business.. people first need power to control and then profit...I don't think any of the above nations will trust any other, therefore, they will not cut in anticipation that other will not..
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Lidless Eye
Lidless Eye Apr 11, 2016 8:22AM ET
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Doha is a hall of mirrors.
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Apr 11, 2016 8:17AM ET
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That meeting is a headfake.
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Cl Chris
Cl Chris Apr 11, 2016 8:11AM ET
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Ellen, excellent piece. This is hopefully the end of the line for the OPEC-NOPEC Hot Air Express, having jolted the price from below $30 to almost $40 (WTI). Fundamentals should take over shortly and the price tank back to the $20s, accordingly. They might try to scam the world again in order to elevate the price, but soon after, they will produce all they can and be at each other's throats. Model nations to follow. NOT.
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Brad Smith
Brad Smith Apr 11, 2016 7:53AM ET
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Thank you for this thought provoking piece Ellen. I'd like to note that Saudi Arabia already has a plan B in the making if the Doha oil freeze deals do not produce the desired results. Saudi Arabia has planned for a gigantic two trillion dollar investment fund in a staunch effort to shift their country away from oil. It almost seems like they are aware of how meaningless the Doha oil freeze deals will be. The economic downturns experienced world wide has also been detrimental to oil as it cuts down the demand. China in particular are going through serious economic setbacks and they are one of the bigger contributors to the oil demand.
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Vinoda Mukar
Vinoda Mukar Apr 11, 2016 5:36AM ET
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Going by environmental concerns & extreme climates in China, India etc Oil's future is bleak down the line, unless we use it sustainably which I doubt OPEC or Russia etc. and of course Politicians would allow. On the other hand, higher Oil prices should be good for Environment, but again Shale-Saudi issues won't let it happen. Moot point is Saudi, Iran n other OPEC members won't let Oil go up so as to protect their market-shares. Most Likely scenario- World growth goes down, oil goes down, no consensus on freeze, Frackers default, full blown crisis, then oil would go up. All this may happen by 2017 end. Things would become ugly before the final low in oil comes. Maybe around $ 15- $ 20. I don't see oil above $100 before 2020.
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Vinoda Mukar
Vinoda Mukar Apr 11, 2016 5:30AM ET
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Going by environmental concerns & extreme climates in China, India etc Oil's future is bleak down the line, unless we use it sustainably which I doubt OPEC or Russia etc. and of course Politicians would allow. On the other hand, higher Oil prices should be good for Environment, but again Shale-Saudi issues won't let it happen. Moot point is Saudi, Iran n other OPEC members won't let Oil go up so as to protect their market-shares. Most Likely scenario- World growth goes down, oil goes down, no consensus on freeze, Frackers default, full blown crisis, then oil would go up. All this may happen by 2017 end. Things would become ugly before the final low in oil comes. Maybe around $ 15- $ 20. I don't see oil above $100 before 2020.
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Kuhailan كحيلان
Kuhailan2010 Apr 11, 2016 5:23AM ET
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Can USA shale oil be trusted?
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Chris Lai
Chris Lai Apr 11, 2016 4:11AM ET
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I agree with your conclusion: no agreement is worthy of anything if there is no enforcement..I believe the chance that all major oil producing countries will work together for more than 6 months approaches zero.
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