Why output freeze is not a farce

[size=32]Why output freeze is not a farce[/size]

27 March 2016

Major oil producers are in the homestretch of an agreement, almost two years in the making, for a joint approach toward stabilizing beleaguered oil markets. If it all comes together next month, it will mark a rare example of Opec/non-Opec joint action — a feat achieved just a handful of times in the last three decades, and made possible this time around by an improbable meeting of minds between Saudi Arabia and Russia, which politically sit on opposite sides of several Mideast fault lines.
The emerging deal intends to freeze up to 73 per cent of global production at January levels when producers gather on Apr. 17 in the Qatari capital Doha. The biggest obstacle standing in the way of the deal, Iran’s insistence it should be exempt and Saudi Arabia’s stance that all Opec member states pitch in, is no longer an issue. Riyadh now says it is open to the freeze even with Iran on the sidelines.
It all came to pass after more than a year of mostly fruitless Venezuelan shuttle diplomacy, but which eventually led to Oil Minister Eulogio del Pino tabling the freeze idea in an early February visit to Moscow and Riyadh. Qatar’s role was central in bringing Saudi Arabia and Russia to an understanding a few days later at a Feb. 15 meeting in Doha, where the freeze framework was officially proposed, say Opec delegates. Qatar was then entrusted to reach a compromise with Iran and Russia that the Saudis could live with, the delegates say.
However, there remain questions about whether the hard-fought, near-agreement is worth all the fuss. Observers panned the freeze as a “farce” and “meaningless” this week, arguing that keeping production below January levels involves no sacrifice, as many — including Saudi Arabia and Russia — pumped at record levels that month anyway. Exempting Iran — as one of the few producers that had any plans to boost output in 2016, by adding 1 million barrels per day following the lifting of sanctions in January — all but ensures the freeze will not chip away at the surplus in the market.
But this agreement has never been about fixing the fundamentals, say Opec insiders. It is designed to build bridges among producers who deeply distrust each other, laying the foundations for further coordination, if needed. “The whole market is a mess. We needed to build trust and we felt we could start with a deal that formalizes peak production for everyone,” said an Opec delegate. It also injects bullish sentiment into a market yearning for guidance, say Opec and non-Opec sources.
The deal ticks the boxes for the most important players, while acknowledging the limitations of consensus among sharply divided producers. For Saudi Arabia, it formalizes its strategy of letting market forces work through the crude oil surplus, recalibrating the price at marginal barrel. Moscow shows that it’s a global player, but at no cost to production, avoiding the ire of Russian firms and officials that deeply opposed artificial cuts. Iran gets a pass, and Opec proves it can still bring producers together, underlining its relevance.
The hardest hit, like Venezuela, hope the current rally to around $40 is permanent. But Gulf Opec countries, while enjoying the bump, think a rebalancing will not happen until end-year. “The freeze means that supply will start coming down, but it will take months to reach a recovery,” says one Gulf delegate. Another sees rebalancing by the third quarter, but not before.
The Iran Compromise
Farcical or not, the freeze would not have been possible if Saudi Arabia had not dropped the precondition that Iran, like all other Opec members, must also participate. So why would Saudi Arabia miss a chance to stick it to rival Iran as it emerges from tough Western sanctions? After all, the Saudis see an Iranian hand in conflicts in Syria, Iraq and Yemen, and say a post-sanctions Iran will stir even more trouble. They could have demanded that the Iranians also sign up to the freeze, threatening to walk away — and probably sinking the price — unless Tehran complied.
Conspiracy-minded onlookers see Russia’s surprise military pullout of Syria as a quid pro quo to Riyadh’s softening stance with Iran, but the evidence looks weak. Opec insiders tell a different story. They say Saudi Arabia’s insistence that Iran be part of collective action should be understood through the lens of cutting production, not in settling political scores — even if some in Riyadh would not have minded that.
Saudi oil officials were preoccupied by the concern that any cut risked being offset by Tehran’s promised post-sanctions boost or buoyant US shale. It was no surprise then that Moscow, which switched from rejecting cooperation with Opec to welcoming it after prices plunged below $30 in January, found little traction in Riyadh on a 5% across-the-board cut.
But the next attempt, the freeze, eased those Saudi concerns, as the deal would not risk any loss of market share. And following Iran’s first few months of post-sanctions production, Saudi Arabia doubts that Iran will get anywhere near its planned 1 million b/d boost for 2016. The most Iran will add is 500,000 b/d — and that amount is not enough to offset a natural rebalancing of the market that is happening anyway, according to the Saudi view.
http://iraqoildaily.com/9860-2/


This article seems to explain more about what to expect.  Hoping this action on the 17th will put onto the path of moving forward and finishing this up.

Thanks
LIT