Crude oil freeze: Matters arising
In a first coordinated move to counter a slump that has pummeled economies, markets and companies, Saudi Arabia and Russia agreed to freeze oil output at near-record levels. The deal struck between Saudi Arabia and Russia to cap oil output was the first meaningful response by producing countries to the collapse in crude prices.
While the deal is preliminary, it is the first significant cooperation between Organization of Petroleum Exporting Countries (OPEC) and non-OPEC producers in 15 years. In addition, Russia and Saudi Arabia are the world’s two biggest crude oil producers, each pumping more than 10 million barrels per day.
The agreement was to maintain production at January levels, rather than cut, and it so happens that last month’s output was already high. Russia pumped 10.9 million barrels a day in January, a post-Soviet record, while Saudi produced 10.2 million barrels, the highest January level in 35 years. Analysts see the accord as a token gesture.
Saudi Arabia has resisted making any cuts in output to boost prices from a 12-year low, arguing that it would be losing market share unless its rivals also agreed to reduce supplies. Fellow OPEC members Qatar, Iraq and Venezuela in Tehran expressed support for the output freeze without committing to restrain the nation’s own production.
Venezuela has been searching for more than a year for some way to reverse the oil-price slump that plunged its economy deeper into crisis.
Over one year since OPEC decided not to cut production to boost prices, oil remains about 70 percent below its 2014 peak. Record global oil stockpiles continue to swell, pushing prices below $30 a barrel.
Half of global oil glut may disappear
The global oil market is over-supplied by around 1.8 million barrels per day (bpd), but that glut could be halved if a deal to freeze oil production at last month’s levels takes effect, a top Russian energy official said.
According to agency reports, Alexey Texler, Russia’s first deputy energy minister, said that “if the agreement is properly fulfilled and it definitively enters into force then around half of that excess supply may be removed from the market.”
“We are talking about freezing January production levels. It would be higher than the annual average for 2015 by around 1.5 percent,” Texler said.
Iran not keen on freeze
Full implementation of the production freeze remains unclear because Saudi Arabia and Russia said their commitment in Doha depended on other producers joining in.
Iran, which was the second-biggest producer in OPEC before sanctions were intensified in 2012, is seeking to boost output by 1 million barrels a day and regain market share. The nation should increase production by 500,000 barrels a day by March 20, the end of the Iranian calendar year.
News have also emerged that Iran, despite being in OPEC, will not limit its own oil output. That would be “illogical”, the Iranian government disclosed, given that the country has just regained access to international markets. Prior to sanctions imposed in 2012, Iran exported 2.5 million barrels of oil daily, with international restrictions cutting shipments to 1.1 million barrels today.
Now sanctions are being lifted, Tehran is determined to regain some of its global market share. That reality, combined with ancient enmity towards the Saudis, makes it difficult to imagine Iran capping its own oil exports, let alone agreeing to an OPEC-wide cut.
Iraq, which signaled support for the deal, has already increased production 70 percent in the past five years as investment flowed into its industry after years of conflict and neglect. Output reached 4.35 million barrels a day in January, according to the International Energy Agency. It aims to pump 6 million barrels a day by the end of the decade.
Nigeria backs oil freeze
Nigeria is backing freezing oil production, according to reports emerging from Doha. The report quoted Emmanuel Kachikwu, Minister of State for Petroleum as saying that the country’s oil production will be 2.2 million barrels a day for this month, which is unchanged from the January output.
“Right now, we are not even exporting the quantity that OPEC has given us because demand for domestic refineries is at least 500,000 barrels per day”, he said adding that by June, OPEC will come very close to tightening the market.
“Nigeria will continue to look at the possibility of increasing production, not to sell it because we have local consumption that is essential for us”, Kachikwu said.
The deal’s success hinges on the participation of other producing countries, notably Iran, which has vowed to raise production by 1 million barrels a day after sanctions on exports were lifted last month.
FRANK UZUEGBUNAM