Five things to bear in mind about the Doha freeze talks
Qatar will host another oil-producer meeting on 17 April. But its success is in the balance
Most of Opec’s members, as well as Russia, Oman, Bahrain and possibly Norway, Mexico, Azerbaijan and Kazakhstan, will gather in Doha on 17 April to talk about freezing oil output and stabilising prices. Momentum towards a deal – building on an initial one from mid-February – has been building for several weeks.
Some kind of freeze will be agreed; the participants know a sharp sell-off would follow any collapse in the talks. Much of the noise in recent days – including Saudi crown prince Mohammed bin Salman’s comments that a deal will hinge on Iranian involvement – has been confusing. But a few things are plain.
1. A deal will immediately firm prices
The earlier Doha deal – between Russia, Saudi Arabia, Qatar and Venezuela – made no real difference to supply. Saudi Arabia and Russia had established high baselines, exacerbating the market’s oversupply, and the freeze cemented them. Still, with the help of outages elsewhere and a seasonal uptick in demand, prices rose by about $10/b in the weeks after the meeting, to around $42/b. Advisors close to the Saudi oil ministry think the freeze put a floor in the market. It certainly signalled that the kingdom is now willing to consider supply-side management, even if real cuts are on no one’s lips.
In reality, the freeze is simply a cost-free method of talking up the market. No one wants to cede market share and trust between the producers is weak. And anyway, with the possible exception of Saudi, each country is producing as much as it can already.
Still, prices will rise following the next meeting on 17 April. The strength might be fleeting, but it will take producers a bit closer to the second half of the year, when they believe market fundamentals will tighten, giving genuine reasons for a recovery.
2. Doha is the new Vienna
The Doha meetings are overshadowing Opec. The organisation has shown its ability to weaken the market by default – see the slump that followed its November 2014 decision to leave production unchanged in the face of a growing supply glut. Plainly, though, it has been unable to marshal that power to prop up prices.
That the Doha deals are happening without any official Opec involvement (though secretary general Abdalla El-Badri will be there) points to its declining influence. For years, it has mainly reflected Gulf-producer (especially Saudi) thinking. So the very symbolism of the freeze talks taking place in the Gulf is also significant. So is the tacit understanding that the real power is between Saudi Arabia and Russia; that Opec’s members on their own cannot collectively support the market.
3. Saudi Arabia is upping the ante and getting its excuses ready
All the signals from the kingdom – including Bloomberg’s interview with deputy crown price Mohammed bin Salman – suggest it is hunkering down for a long period of oil-price weakness. The reforms on the agenda, including an IPO for parts of Aramco, subsidy cuts, new taxes, and a new sovereign-wealth fund, are strategic.
They suggest the kingdom’s leadership has bigger fish to fry than a short-term jump in Brent. That gives the Saudis an advantage in Doha. It also means that Mohammed bin Salman’s threat to abandon the deal if Iran is not involved – and Tehran says it will attend the meeting but not freeze – should be taken seriously. As if to reinforce this, Kuwait said recently it had agreed with Riyadh to reopen the Khafji field in the Neutral Zone. That gives the two countries up to 300,000 barrels a day of oil – perhaps more, if another Neutral Zone field, Wafra, were also reopened – to throw on the market if Riyadh thinks Doha is going to be a wash. That is a major weapon in its arsenal.
The deputy crown prince’s comments about Iran also give the kingdom a convenient excuse to carry on with its own oil marketing policy, regardless of Doha. If you weren’t already sceptical of the deal, that should give you pause.
4. Aside from Iran, the outcome of a deal might hinge on peripheral producers
The sole Opec member not planning to attend the Doha meeting is Libya. It’s still not clear yet who is governing Libya, so that is one reason. But Libya also desperately needs to increase output, which is now beneath 300,000 b/d, or about a fifth of its pre-2011 capacity.
It won’t manage this easily in the short term. But Libya’s light sweet crude is so highly prized that even a doubling of output – say if the Sharara and El Feel fields were restarted – would hit Brent prices hard. Rising Iranian output is already priced into the market, notes one Opec insider, but not Libyan.
On the other side of the ledger, problems in Nigeria’s Delta region could do the opposite, removing another source of highly prized crude oil from supply. Forcados production has already been hampered by unrest in the region.
In short, Saudi Arabia, Russia and others might agree on a collective output number, based on individual baselines, in Doha on 17 April. But smaller producers with a disproportionate significance in the Brent market could conceivably ruin the effort to stabilise prices.
5. The impact of a successful deal might be short-lived
Russia says $45-50/b would be an “acceptable” price, and that anything higher would allow US tight oil production to recover, according to an unnamed source quoted by Reuters.
If that’s a target for Doha, it’s a risky one. As prices rallied in February following the first Doha deal, some US producers were already able to secure new hedges, helping them weather the slump – and keep producing. While plenty of tight oil wells will be uneconomic at $45-50/b, lots of others will come back into play.
As Justin Jacobs wrote in a long piece from the Permian for Petroleum Economist’s April issue, the sliding scale of profitability in Texas’s key tight oil play suggests another price rise would start to perk up the region. Chevron, for example, has few Permian wells that break even at $30/b, but 4,000 that would turn a profit at $50/b. At $40/b for WTI, Occidental Petroleum doesn’t see much profitability. “But give it $50/b and nearly 1,200 of the 8,5000 drilling locations it has identified would return handsomely,” writes Jacobs. Costs are falling and the number of viable wells is growing too.
So, the Doha producers may succeed in talking up the market – but their efforts might be self-defeating. Their output freeze, if it has the impact they want it to have, might just end up unfreezing supplies elsewhere.