oil glut

Oil Agreement Fails To Impress

February 16th, 2016 by

oil glutThe global oil market was on the edge of its seat last night, awaiting the results of the closed-door meeting in Qatar between Russia, Saudi Arabia (the world’s top two oil producers,) Venezuela, and Qatar. After a brief initial euphoria, markets realized that this agreement wasn’t much of an agreement at all.

The four nations agree to “freeze” production at January levels, but only if all the other major oil producers agree to do the same. There’s fat chance of that, as Iran is just now recovering from international sanctions, and is still producing 1million barrels a day less than pre-sanction levels. It has said that it will not even consider any production limits until its output recovers.

What Does This Agreement Do?

  • oil-man-white-backgroundThis agreement brings together OPEC’s largest oil producer — Saudi Arabia, and the world’s largest non-OPEC oil producer — Russia. To have them agree to anything is seen as a huge step forward.
  • The agreement to keep production at current levels is probably the most that could be expected of a first step towards normalizing the oil market.
  • Iraq and Kuwait have signaled that they will sign on if others do. This is an encouraging first sign.

What Does This Agreement NOT Do?

  • It does not bring production down one whit from the present over-pumping. Seeing as how the Saudis and Russian are both pumping as fast as possible, there is no change in market conditions today compared to yesterday.
  • Iran will in no way agree to production limits at January levels. They may even see this as a ploy by the Saudis to put them at a competitive disadvantage.
  • Even if pigs start to fly, and Iran, Iraq, and Kuwait join the agreement, there’s no indication (yet) that the other eight members of OPEC will agree.
  • US shale drillers are salivating at the prospect of higher oil prices. Their ability to rapidly bring already-drilled wells online in as little as two weeks makes them the new “swing producer” in the global oil picture. They would naturally love to pay Saudi Arabia back for all the pain they’ve suffered through since the November 2014 OPEC decision to try and kill off shale drilling.
  • The last time OPEC and Russia made an agreement to limit production was 15 years ago. It didn’t end well, with Russia increasing production while OPEC cut production.

What Can We Really Expect?

oil-rigIf today’s announcement just wasn’t the Petroleum equivalent of central banks “talking up the market,” it is just the very start of a long, difficult process. There are whispers that Iran make be offered an exemption to production freezes until it can recover its normal output. Even if every oil producer of note on the planet agreed to a production freeze, it would still be far more than global demand. The world is likely to run out of storage facilities before demand rose to just meet supply, let alone exceed it to the point that a world-record surplus could be worked through.

One thing is certain: someone’s going to cheat.

 

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product