Breaking News
0

Will OPEC Ever Really Agree To An Oil Production Freeze?

By Ellen R. Wald, Ph.D.CommoditiesSep 27, 2016 06:15AM ET
www.investing.com/analysis/will-opec-actually-agree-to-an-oil-production-freeze-in-algeria-200155659
Will OPEC Ever Really Agree To An Oil Production Freeze?
By Ellen R. Wald, Ph.D.   |  Sep 27, 2016 06:15AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This Wednesday, OPEC members will meet on the sidelines of the International Energy Forum in Algeria. As they did in Doha last spring, members plan to discuss a potential oil production freeze.

Rumor, rhetoric, and innuendo about this oil freeze has overshadowed almost every other energy-related issue since the meeting was scheduled. Oil markets rose on Monday as OPEC members arrived for the start of the IEF conference. The instigation of this price gain was a hope that OPEC will reach an agreement to cap production.

Investors, however, should be prepared for a let down. Despite the mood of cautious optimism in Algeria, the key players have little incentive to make a deal at this point. Indeed, most of OPEC and other major oil producers are preparing for a future of continued production expansion.

Here is rundown of the position of each key player and the likelihood that that country will support a freeze on oil production:

Algeria: 1.01 million bpd

Algerian oil minister Nouredine Bouterfa has been spouting some very optimistic rhetoric. Specifically, he has said that Algeria will propose that OPEC reduce production by 1 million bpd. He has been trying to use Algeria’s presence as host country to push a deal forward, but none of the other OPEC members seem to be taking him as seriously as the oil market. Algeria produces less than every other OPEC member except Indonesia and Gabon and, therefore, has very little clout in the organization. Bouterfa’s bluster is at least partially directed at the Algerian populace to position himself as a strong leader who is doing his best to improve its economy. Meanwhile, Algeria is proceeding with plans initiated over the summer to increase its own production.

Position: Algeria will support a freeze deal but its resolution to cut OPEC production will not be successful.

Venezuela: 2.1 million bpd

President Maduro supports an oil freeze deal and told reporters last week that a market stabilizing deal is “close.” Venezuela’s oil production has actually decreased since oil prices collapsed, because the country cannot afford the electricity needed to keep up oil production. Despite the fact that the country lacks enough food to feed its citizens, Venezuela recently signed a new contract with Schlumberger (NYSE:SLB) to drill 80 new oil wells in the Orinoco Belt. The ambition is for this endeavor to add 250,000 bpd to Venezuela’s output by 2019.

Position: Venezuela may say a deal is “close,” but the government is making plans to increase production. Venezuela will support freezing production for the short term price increase that would result, but its long-term plans are to increase production.

Iraq: 4.35 million bpd

Iraq claims it supports an oil freeze deal but with a big caveat: Iraq seeks an exemption from any production freeze because of its years of war and current conflict with Isis. Iraq seeks to increase its production to at least 5 million bpd and recently signed an agreement with the Kurdistan Regional Government to resume exports from areas under Kurdish control.

Position: Iraq could be convinced to join a production freeze if OPEC reaches a consensus, because it is currently OPEC’s second largest producer. If production is frozen at current levels, Iraq will not have to worry about Iranian production usurping its market share. However, if other nations demand exemptions, then Iraq will join them.

Iran: 3.6 million bpd

President Rouhani’s recent remarks reveal Iran’s position on a potential oil freeze deal:

“Instability and falling oil prices are harmful to all countries, especially oil producers. Tehran welcomes any move aimed at market stability and improvement of oil prices based on justice, fairness and fair quota of all the oil producers.”

This means that Iran supports a deal in which other OPEC nations freeze their production while Iran increases its own production. Iran’s position is that “justice” and “fairness” would provide it an exemption because of the sanctions it faced for years.

Over the past year, Iran has said that it seeks to increase production back to its pre-sanctions levels – around 4 million bpd. Since Iran is reportedly on the cusp of this number, many analysts believe that the country is ready for a deal. This is not the case.

Recently, Iran revealed much loftier goals – of at least 5 million bpd. Now that the Iranian government approved a new, slightly more promising model for foreign companies to invest in Iranian oil development, Iran has no desire to restrict its production. Not only that, but the country recently turned down an offer from Saudi Arabia to cut its own oil production if Iran would agree to freeze production at 3.6 million bpd.

Position: Iran will only support a freeze deal if it is granted an exemption.

Saudi Arabia: 10.7 million bpd

Since Saudi Arabia’s meeting with Russia, on the sidelines of the G20 conference, oil minister Khalid al-Falih has said very little on the subject of a production freeze. The Russian-Saudi meeting caused a short spike in oil prices when investors thought they would announce a freeze.

However, oil prices immediately fell back down when it became clear that the agreement they signed fell considerably short of that. Just last week, al-Falih met with his Iranian counterpart at OPEC headquarters in Vienna, and the Saudis offered to cut oil production back to January levels. This was Saudi Arabia offering to cut oil production to non-summer levels (just as the end of summer approaches and the Saudis need less oil domestically to power their air conditioners).

In exchange for this “cut,” al-Falih sought an Iranian production cap of 3.6 million bpd. Iran rejected the offer. The parties also disagreed on how production would be measured. Iran wanted to self-report while Saudi Arabia demanded an independent source to verify the numbers. This suggests that even if Iran had agreed, it had no intention of complying.

Position: Saudi Arabia does not see an imperative to freeze production at this time. The country will most likely support a production freeze, but only if all OPEC nations and Russia join. Saudi Arabia would not support any exemptions for other countries and would demand independent verification.

Russia: 11.9 million bpd

At the beginning of September, President Putin expressed support for a Russian - OPEC oil production freeze with an exemption for Iran. Since then, however, Russia has walked back that position.

Oil minister Alexander Novak is attending the IEF conference but may leave before the OPEC meeting even takes place. He has stated that Russia will not consider a production freeze unless OPEC resolves its internal divisions on the subject. Meanwhile, Russia is planning new investments to increase oil recovery in its older, so-called “brown,” fields. In addition, Rosneft (MCX:ROSN) and Gazprom Neft (MCX:SIBN) plan to drill new wells in areas considered “hard-to-recover.”

Despite the increased expense, these firms believe such wells will be profitable even if oil remains in the $40 a barrel range. Russia recently stated that it sees no need for an oil freeze and Prime Minister Dimitri Medvedev said that the country should prepare its budgets for the next three years based on a price of $40 a barrel. (Note: though Russia is not an OPEC country, its participation would be vital to any freeze because of its production volume, its competition with Saudi Arabia for sales in key markets, and its relatively centralized control of ostensibly private oil companies).

Position: Russia does not have high hopes for an OPEC consensus and is not particularly interested in joining a freeze deal even if OPEC reaches one. Even if a freeze materialized, Saudi Arabia would remain suspicious of Russia’s intentions to comply given Russia’s support for Iran.

Will OPEC Ever Really Agree To An Oil Production Freeze?
 
Will OPEC Ever Really Agree To An Oil Production Freeze?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments
AJ Pascual
AJ Pascual Oct 02, 2016 4:50PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I read Venezuela cant afford electricity needed to pump oil. Oh my
Reply
0 0
Do Deikins
DoRight Sep 28, 2016 11:00AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thanks for the analysis of the major producers, but what of the other OPEC producers? (mainly sub-Saharan Africa)? I guess the other large producers in the Gulf will follow S.A.'s lead and the sub-Saharan producers have problems meeting the quota already assigned..What are the chances that some of those producers (and Indonesia) would agree to giving up some of their quota to allow some leeway for Iraq and Iran. Probably would be political suicide for those giving up quota even if they can't meet their current level..The new kid on the block is self-reporting vs. independent review. That roach in the rice is a good excuse for not making a deal..And as has become the new 'now', they won't make a deal when they know the new swing producer 'shale' will benefit and take advantage of higher prices.
Reply
0 0
Nebojsa Dobrijevic
Nebojsa Dobrijevic Sep 27, 2016 8:54AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
NIce spin of story from competing website. I'd call your article plagiarism.
Reply
0 0
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email