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Freezing output does nothing for the oil market

If the best Opec can muster is a weak deal not to lift already high production this will add little strength to prices. But the Doha deal may be just the first step

After weeks of shuttle diplomacy, Eulogio Del Pino, Venezuela’s oil minister and the agitator-in-chief leading calls for big producers to cut crude output, has his answer. Saudi Arabia, Russia, Qatar and Venezuela agreed in Doha on 16 February to freeze production at January’s levels – provided, in the words of Russian energy minister Alexander Novak, “other producers agree to this initiative”.

If that’s the sum of it, the oil market is going nowhere fast. 

Russian production reached a record high of 10.88m barrels a day in January. Opec production, at 32.63m b/d in January, is almost 0.6m above its 2015 level. Keeping output where it is will do nothing to stop global stocks building. The International Energy Agency was plain in its most recent market commentary: at flat Opec production levels this quarter, stocks will build by 2m b/d and then 1.5m b/d in Q2. In the second half of the year, inventories will keep rising, by 300,000 b/d.

The market wanted more from the meeting. Having surged higher in anticipation of the announcement, prices immediately pared their gains on hearing the news. WTI was down slightly by mid-day, with a $29 handle. Brent had pared back most of its gains, trading back below $34 a barrel.

But expect more volatility. Novak’s caveat about “other producers” agreeing to the plan now puts the onus on Iran and Iraq. Any rise now in Iranian output – in line with its ambition to restore pre-sanctions production levels, initially by releasing stored oil – gives Riyadh and Moscow a convenient excuse to ignore the Doha deal (Venezuela and Qatar won’t ignore it, because they aren’t in a position to lift output anyway).

The only significance in the Doha agreement is that for the first time since November 2014 Saudi Arabia is willing to talk publicly about any supply constraint at all. This is a shift in policy, and is understood to be the outcome of political intervention in Riyadh, from deputy crown prince Muhammed bin Salman’s office.

But many other factors could yet wreck even this tiny first step. The geopolitical rivalry between Saudi Arabia and Russia in Syria hangs over any cooperation in oil markets. Russia’s patchy history of actually cutting output when it has agreed with Opec members to do so means the market will hunt for evidence of non-compliance.

Careful to get its qualification in early – that the freeze will only happen if others agree – Russia will struggle to convince the market of its seriousness. The Kremlin has already deferred to the energy ministry for comments on Doha. A statement from President Putin would have brought more credibility. It’s unclear quite how the government would enforce any freeze on producers too, especially as the rouble’s fall has left exporters scrambling to maximise dollar-traded supplies.

Iran’s attitude will be critical. Reuters has already quoted a ministry source saying it will freeze output – but only after it has recovered the production it lost to sanctions. That’s enough to destroy the Doha deal, while allowing Saudi Arabia to blame its rival.

In short, the Doha deal has some meaning: production management is now back on the table. Behind-the-scenes talks will continue, and the market’s muted reaction to the Doha news will concentrate minds. Opec’s meeting in June – by which point Riyadh and the rest of the market will know better how much oil Iran is adding, how much the US is losing, and how much consumers are burning – now holds much more potential.

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