Oil market shows deep doubt over output freeze | Reuters - Firstpost
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Oil market shows deep doubt over output freeze | Reuters

Updated: Feb 18, 2016 01:45 IST

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LONDON The oil world has been shaken this week by some of the biggest producers agreeing to freeze their output at January levels to contain a supply glut and prevent a further slide in prices, but markets show investors doubt this tactic will work.

Oil ministers of top exporter Saudi Arabia, Qatar and Venezuela, together with non-OPEC member Russia, said after meeting in the Qatari capital of Doha on Tuesday they had agreed to keep output unchanged from January, provided other big guns followed suit.

Iraq, Kuwait and the United Arab Emirates said they would observe a freeze, on condition enough other large exporters did the same.

The wild card is Iran, returning to the markets after years of sanctions, which has said it will resist any such curbs and stick to its pledge to increase production by 1 million barrels per day in the next 6-12 months.

Oil ministers from Iran, Venezuela, Iraq and Qatar met in Tehran on Wednesday and Iranian oil minister Bijan Zanganeh said his country welcomed the decision by OPEC and non-OPEC oil producers to keep a "ceiling" on output.

But Zanganeh did not explicitly say whether Iran would keep its own output at its January level.

Tellingly, the longer end of the Brent futures price curve suggests that, for now, investors doubt that any such freeze would tilt the market into a supply deficit any time soon.

The proposal aims to stem a 70 percent fall in the oil price over the last 20 months, after U.S. shale oil output and near-record production from OPEC and other major producers such as Russia created one of the largest global surpluses of modern times.


Benchmark Brent futures prices rose by nearly 5 percent from Tuesday's close to above $34 a barrel by 1615 GMT following the Tehran talks.

"Doha may have ended in an agreement but it opens up more questions than it answers. All the meeting has done is highlight the difficulties in reaching any agreement. The market needs a cut, not a production freeze," David Hufton, an analyst at broker PVM Oil Associates, said.

In January, OPEC and Russia, the world's largest producer, were already pumping at or near record highs.

The premium for oil in a year's time compared with oil for immediate delivery briefly spiked to nearly $9 a barrel on Tuesday, after the announcement, only to be winched back to a four-month low around $6.

The larger the premium, the greater the expectation among investors that the supply of oil will be less plentiful in future and the gap right now is at its narrowest since October 2015.

Further out, investors do not expect the oil price to trade far above $40 a barrel even by December next year.

The December 2017 Brent futures contract trades at a premium of just over $10 to the front month April contract.

Even if the major producers did agree to freeze or cut production, nimble U.S. shale producers could take advantage by boosting output to replace any fall in supply.

Some analysts believe the major producers, which can produce at low cost, may be better off putting up with a period of low prices to drive higher-cost competitors out of business.

"A sizeable, visible and lasting cut would clearly send a bullish signal to markets – in the short-term. But given U.S. shale players’ ability to bounce back, and U.S. investors’ desire to pounce amid a dearth of other opportunities, this could quickly re-stimulate production, and prices could arguably stay lower in the medium-term in this case," analysts JBC said in a note.

(Reporting by Amanda Cooper; Graphic by Stephen Culp; Editing by Adrian Croft)

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