Potential oil freeze deal: What five experts think about the historic producer meeting in Doha

 
Jessica Morris
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Talk of a potential freeze deal has helped oil prices recover from near 12-year lows (Source: Getty)

Rising tensions between rivals Saudi Arabia and Iran could inhibit a historic oil production freeze deal widely expected to be inked today.

Some 18 Opec and non-Opec countries, including Russia, met in the Qatari capital of Doha to firm up an agreement to freeze oil output at January levels, a move which would support crude prices.

Ministers started talks after 12.30pm, sources told Reuters, but the prospects of a comprehensive deal looked slim.

The meeting was delayed after de facto Opec leader Saudi Arabia reportedly told participants it wanted all of the cartel's members to take part in the freeze.

Opec rebel Iran has repeatedly refused to take part until its oil output has returned to levels enjoyed before the US and European Union embargo.

Here is what five experts from academia and business think about today's meeting:

Andreas Economou, is a doctoral researcher at the UCL Energy Institute and a OIES-Saudi Aramco Fellow:

"For Saudi Arabia, the scope of the agreement is very specific – to artificially create a more economically sensible $40 per barrel price floor and lay the foundations for a move to $50 per barrel in the second half of 2016."

"The key objective is to test the US shale supply response to the upside and gather valuable information regarding the pain threshold of shale oil in order to learn how to coexist with the US shale “aggressors” at higher prices."

"Another important point to consider is that an agreement in Doha will essentially reaffirm Opec’s status as a dominant and coherent organisation."

"Finally, all else remaining equal, Iran’s participation could then be part of a phase-two of the “As-Is Agreement”, in an attempt to push the price floor a step higher at $50 per barrel and lay the foundations towards $60 per barrel by the end of 2016 or early 2017."

Lauren McKee is a visiting assistant professor specialising in political science and Asian studies at Berea College:

"The current oil markets bears marked similarities to the oil-glutted market of the 1980s when Opec producers over-pumped their quotas and Saudi Arabia had to cut its own exports to prop up the price of oil, a move that resulted in a sharp decline in market share for the Saudis."

"Today, the Saudis are caught between a rock and a hard place—do they cut their own production to again raise the price of oil and, in doing so, return oil to a price at which they can balance their national budgets (and stave off domestic political instability)?"

"If so, the Opec swing-producer runs the risk of losing market shares of oil production in the short and long terms to one of the only producers currently capable of absorbing such a global supply loss — Iran."

"Additionally, a major difference from the 1980s the Saudis have to contend with today is the emergence of the United States as a competitive oil producer. Increasing the price of oil benefits the Saudi bottom line, but at the expense of strengthening the competitor they’ve endured low prices for so long to weaken."

"Geopolitical tensions are exaggerated in tight oil markets, and the Saudis and the Iranians are not exempt. Any agreement to freeze oil production will be a balancing act of cooperation and defection among participants, whether Iran is involved in the agreement or not."

"The only sure winner in this scenario is the re-emerging American oil market, which would greatly benefit from a higher price of oil."

Sebastien Marlier is senior commodities editor focused on major agricultural, industrial and energy commodities at the Economist Intelligence Unit:

"The key to the Doha meeting is to look at who will remain out of the agreement."

"A key absentee is Libya. An Opec-member, conflict-ridden Libya does not feel responsible for the global supply glut: at 400,000 barrels per day, Libya's production in 2015 was only a quarter of what it was in 2010. Yet the UN-backed Government of National Accord, which has in effect supplanted one of the multiple governments vying for power, has recently moved to Tripoli from Tunisia in late March, raising hopes of an improvement. Libya's full return to the market is probably some years away, but even a modest increase could scupper the efforts of the freeze camp."

"The other party-pooper is Iran. Iran will attend the Doha summit, but will not join any output freeze, insisting on its "legitimate" right to raise output after years of crippling sanctions. Even if its production ramp-up disappoints, Iran's refusal means other Doha participants will need to make even greater cuts for any deal to be effective."

"Perhaps the biggest question mark is Saudi Arabia, however: it supports the freeze, but says it will only join if arch-rival Iran does. Furthermore, it has yet to clarify whether a freeze would include production from the Saudi-Kuwaiti neutral zone, where some fields are set to resume production."

Giovanni Staunovo, in a commodity analyst at wealth management research, UBS.

"It may be premature for celebration of an agreement in the oil markets."

"Iran is unlikely to sign on to a production deal given its newfound economic freedom."

"Libya is expected not to participate either, as it is producing well below potential due to its civil war."

"Meanwhile, Iraq, Opec’s second-largest producer, has signalled its openness to a deal, but we don't see it abandoning its goals to boost production capacity by over 1.5m barrels per day in the next few years."

"Furthermore, several US oil companies have announced aggressive capex cuts for this year due to the low price environment. Cutting production to raise prices now would throw a lifeline to US shale producers – the US contributed 70 per cent to non- Opec supply growth in 2014 and 2015 – and would delay the adjustment process."

Michael Moran is a managing director at global risk and strategic consulting firm Control Risks:

"The freeze deal, should it happen, will have an immediate but temporary impact on oil prices."

"While Russia and Saudi Arabia can affect the oversupply by reducing production, their decision is likely to have more of a symbolic than real effect on global prices and oversupply is likely to persist for another year at least."

"This is because the emerging markets, which accounted for the lion’s share of new demand in the first decade of the 21st century, remain in or near recession."

"Iran will ignore any call from Opec to reduce production as it feels it has the right to reclaim its place as one of the world’s top five oil exporting states, which was lost during years of punitive EU and US sanctions tied to its nuclear weapons program."

"A number of smaller OPEC producers – Nigeria, Venezuela, Angola, Algeria – are facing severe fiscal problems stemming from the oil price slump and (in keeping with the historical record) are unlikely to abide by promises to lower production whatever they say publicly."

"Finally, while US tight oil (fracking) production has started to drop – implying lower US production for 2016 than originally forecast – reductions from this disruptive, unconventional source of crude will reverse very quickly if oil tops $50 per barrel, where most fracking operations will again be profitable."

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