Oil price: More than words needed


  • Business
  • Thursday, 18 Feb 2016

THE key takeaway from the recently concluded agreement between Saudia Arabia and Russia in Doha to freeze oil output at January levels is this: it’s business as usual.

Why? There was no production cut, just an agreement to maintain output at last month’s levels, which is significant.

It’s significant because Russia produced 10.88 million barrels a day last month, while Saudi Arabia produced 10.20 million barrels. For Russia, not a member of the Organisation of Petroleum Exporting Countries (Opec), this is a post-Soviet record while for Saudi Arabia, Opec’s de facto leader and the world’s largest producer of crude oil, this was the highest January level since 1981.

Markets have reacted with scepticism to the agreement, because at these levels, there is still an excess of between one and two million barrels of oil per day. No wonder crude oil prices fell to 12-year lows last month. The global economy will not be consuming so much because growth is slowing.

We can also conclude that crude stockpiles will continue to rise, which will put pressure on prices.

Both countries even got Qatar and Venezuela, both Opec members, to agree.

Now, they are trying to persuade Iran and Iraq to do the same. Good luck to Saudi oil minister Ali Al-Naimi and Russian energy minister Alexander Novak! Both Iran and Iraq are determined to claw back market share and will have a dim view of any cap on output. Iraq produced 4.35 million barrels a day in January, with signs of ramming production higher, while Iran has set a target of producing one million barrels a day this year.

The Doha agreement will not be worth much simply because of compliance.

Historically, Opec members, who control around 40% of global oil production, have not had a good record in complying with mutually set output limits.

This is because members have different geopolitical considerations and economic interests that may not necessarily go hand-in-hand with the interests of the oil cartel.

The only interest they share is maintaining their respective market share and that includes making sure that non-Opec members do not win market share.

The ongoing narrative is that Opec has stubbornly maintained production levels in the face of declining oil prices in order to kill off US shale-oil producers. That strategy has had some impact as the US rig count has declined, but surviving shale-oil producers have hung on and continued to produce, adding to the global glut.

However, the old way of doing things must change. It must not be business as usual because in the long term, technology will assure the commercial viability of technically hard-to-reach oil.

Economies are also becoming more efficient in using energy, so consumption may not even rise significantly even when the global economy improves.

One thing is for sure, expect prices to fluctuate between US$25 and US$35 per barrel for the forseeable future.

Prices will not rise above US$35 until there is more certainty.

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Business , Saudi Arabia , Russia , oil , freeze output , Iran , Iraq

   

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