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:
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.
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 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.
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.
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.
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.
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