Portfolio | Oil producers must take tough decisions to restore equilibrium
Several Opec and major non-Opec members have signed up for confabulations over a “production freeze” proposal scheduled for April 17 in Doha, suggesting a fresh groundswell of support for an interventionist approach to stem the growing tide of oil in an oversupplied market.
Holding output steady at January 2016 levels – if such an agreement is indeed forged and complied with – may rein in the handful of producing countries actually able and wanting to raise output, but by definition won’t reduce the 1.5-2 million b/d current oversupply or propel the market towards supply-demand equilibrium. Only a production cut could do that.
Iran, poised to displace the US as the largest contributor to global crude supply growth this year, is expected to stay out of any freeze agreement, though there are signs of an emerging consensus to proceed without Iran. War-torn Libya, whose production has been languishing around 300,000 b/d against a potential of 1.6 million b/d, has also declined to participate.
A sanctions-free Iran has been aggressively courting customers and resumed term and spot crude sales to buyers in Europe after a nearly four-year hiatus, but it still cannot be paid in US dollars and its shipments are not getting full protection and indemnity (P&I) cover. The country managed to raise production by a modest 210,000 b/d in February, the first full month after the lifting of sanctions, reinforcing the view that its return to full potential will be a slow and gradual one.
As the drumbeat over the freeze plan grew through March, Brent as well as Nymex light sweet crude futures clambered to year-to-date highs above US$41/barrel, 50-56 per cent above their respective January nadirs, in another reminder of sentiment and snap judgment prevailing over logic and cool reasoning in the oil markets.
As March wound down, the futility of a freeze started sinking in, and crude futures let out some of the steam. Brent slid below the US$40 psychological mark, defying the upward pressure from a weaker US dollar and diverging from an uptick in equities spurred by dovish comments from Federal Reserve Chair Janet Yellen March 29, which pushed expectations of the next rate hike farther down the road.
A landmark agreement between Kuwait and Saudi Arabia March 29 to restart production from their jointly operated 300,000 b/d Khafji oilfield in the offshore Partitioned Neutral Zone, which was unilaterally shut by Saudi Arabia in October 2014 following a dispute, added a further bearish tone to the markets.