Here's why the oil production freeze won't be a 'game-changer'

Saudi Arabia, Russia, Qatar, and Venezuela have agreed to freeze oil production at the level of supply produced in January.

But analysts aren’t exactly impressed.

This “output freeze [is] not a game-changer for the Gulf economies,” argued Capital Economics’ Middle East economist Jason Tuvey in a recent note to clients.

As for why this is likely the case, analysts have identified two red flags:

  1. Production from Russia, Qatar, and Venezuela wasn’t expected to rise much anyway.
  2. And Iraq and Iran are not mentioned in this agreement.

For starters, people weren’t expecting oil production to rise much this year — and especially not from Russia, Qatar, and Venezuela, which “are already stretching their production limits,” according to Barclays’ Miswin Mahesh and Kevin Norrish.

As Barclays explained in greater depth:

“Russian output, although currently near a post-Soviet peak, is expected to remain flat this year as decline rates catch up. Neither does Qatari output have much potential to increase, and its output has been steadily declining recently. Qatari output in January is at 655 kb/d, far from the 800 kb/d averaged in 2011 and lower than the 668 kb/d averaged in 2015. Venezuelan output is also at risk of falling this year, especially given its need to import light crude and naphtha to blend with its heavy crude production in order to sustain export volumes.”

Secondly, Iran and Iraq are noticeably absent here, as Tuvey noted, which is significant because both countries have the potential to see big production increases.

Iranian exports are already inching higher after the removal of sanctions (although exports are still below pre-sanctions levels), and comments from Iran’s vice president suggest that the country’s exports have expanded to 1.3 mb/d and are expected to to reach 1.5 mb/d around March 20, according to Barclays.

And according to Capital Economics’ Julian Jessop, “Iran has already indicated that it is unwilling to freeze its output until it reaches pre-sanctions levels, which implies an increase of at least 1m bpd still to come.”

Additionally, Barclays noted that Iraq’s output is near record highs of 4.38 mb/d in January.

And while Iraq is often overlooked, back in July JPMorgan analysts argued that, “additional supplies from Iraq are pressuring world oil prices [even] more than Iran at this juncture.”

There have, however, been questions about how easy it is to get oil out of Iraq.

But in any case, even if this latest plan can be implemented, analysts aren’t expecting a huge positive impact on either the oil market or on struggling Middle East economies.

“Overall, any positive oil price impact from this move, beyond a kneejerk covering of short positions, is highly contingent on other key oil producers joining in,” Barclays writes.

“And although the announced plan is the first concrete attempt at limiting output that Saudi Arabia has publicly supported, a lot of hard negotiations lie ahead if it is to prove successful.
Even then the key beneficiaries could turn out to be US tight oil producers.”

Moreover, “for the deal to have any teeth, Saudi Arabia in particular needs to be willing to cut output, not least to offset the increased supply still to come from Iran,” argued Jessop. “The upshot is that the deal leaves plenty of room for disappointment.”

Or as Barclays writes, “these developments officialize what is already happening.”

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