Doha stalemate: The morning after

Oil producers that supply almost half the world’s crude gathered in Doha on April 17 to negotiate a production freeze at January levels in an effort to strengthen prices. Russia, Saudi Arabia, Qatar and Venezuela made a preliminary deal in February and are seeking to add more producers and extend the current price recovery.

Some 18 oil nations, including non-OPEC Russia, gathered in the Qatari capital of Doha for what was expected to be the rubber-stamping of a deal to stabilize output at January levels until October 2016.

In addition to the four signatories to the preliminary deal, Algeria, Angola, Azerbaijan, Colombia, Ecuador, Indonesia, Iraq, Kuwait, Nigeria, Oman and the United Arab Emirates attended the meeting. However, some of the world’s biggest producers including the US, Canada, China, Brazil, Norway, Argentina, Libya, Kazakhstan, Mexico and Iran skipped the meeting.

Among the 13 nations in the Organization of Petroleum Exporting Countries, Libya and Iran did not take part in the meeting. Libya’s output has been crippled by conflict while Iran has insisted it will constrain production before reaching pre-sanctions output.

Production from the 11 members of the Organization of Petroleum Exporting Countries that are backing the agreement is already almost half a million barrels a day lower than January.

No agreement

The talks collapsed after Saudi Arabia surprised the group by reasserting a demand that Iran also agree to cap its oil production.

After five hours of fierce debate about the wording of a communiqué, including between Saudi Arabia and Russia, delegates and ministers announced no deal had been reached.

“We concluded we all need time to consult further,” Mohammed al-Sada, Qatar’s energy minister told reporters.

Oil prices had rallied in recent weeks on speculation that Saudi Arabia might successfully lead an initiative between members of the OPEC and Russia, which joined the talks.

A deal would have marked a new level of cooperation between non-OPEC countries and OPEC members that producers hoped would keep prices above January lows of $26 a barrel.

While markets could be disappointed by the failure to freeze oil production in the short term, the longer-run impact could well be blunted by the reality that low prices are already pushing out many cash-strapped producers, making a formal freeze less important.

Saudi Arabia’s position that Iran joins the freeze or there would be no deal scuttled the discussions before they started, participants said, and the meeting descended into sniping and confusion.

The day before the meeting, Saudi officials in the delegation had signaled that the kingdom would consider a freeze without Iran’s participation, and a draft agreement was circulated, according to participants.

The US Energy Information Administration said in its recent short-term energy outlook that US crude production fell by 90,000 barrels a day in March, from February. The agency lowered its domestic-output forecast for this year to 8.6 million barrels a day, and to 8 million barrels a day in 2017. That is off from a multi-decade peak of 9.4 million barrels a day last year.

Iran vows to keep pumping

Iran is also pledging to ramp up production following the lifting of Western sanctions in January, making a compromise with Riyadh almost impossible as the two fight proxy wars in Yemen and Syria.

Tehran had refused to stabilize production, seeking to regain market share post-sanctions.

Alexander Novak, Russian oil minister called the Saudi demand “unreasonable” and said he was disappointed as he had come to Doha under the impression that all sides would sign the deal instead of debating it. Novak said Russia was not shutting the door on a deal but the government would not restrain output for now.

Russia is a key ally of Iran and has been defending Tehran’s right to raise output post-sanctions while also supporting the Islamic Republic in many of its conflicts with Riyadh.

Oil prices go southwards

Following failure to reach an agreement to freeze output, oil prices have headed southwards. Brent, the international benchmark, was down 3.9 per cent at $41.42 a barrel in Asia while West Texas Intermediate, the US marker, was down 4.2 per cent at $38.66 a barrel.

The last time OPEC struck a deal with rival suppliers was in late 2001, when Russia, Mexico, Oman, Angola and Norway promised to cut supply by 500,000 bopd. Yet by the middle of the following year, Russia had actually increased output and the only production declines were in Mexico and Norway, neither of whom are part of the Doha meeting.

Had the freeze agreement been successful, analysts believe the deal could have pushed up prices and that would be “self-defeating” because it would allow a revival of drilling by US shale producers, who can return to work at $55/bbl, according to Goldman Sachs.

FRANK UZUEGBUNAM