Russia’s energy minister thinks a plan concocted by some of the world’s biggest oil producers to freeze output at current levels has achieved a “critical mass” of proponents. The WSJ reports:
After meeting with President Vladimir Putin and top Russian oil executives, Energy Minister Alexander Novak said countries producing 73% of the world’s oil had agreed to the tentative deal, according to state news agency TASS. Mr. Novak said capping oil production would prove effective even without Iran, which hasn’t said it would take part. […]Mr. Novak said talks were continuing on how to monitor implementation of the production freeze. He said the aim was to stabilize the price of oil around $50-$60 per barrel, as any higher price would again create excess supply.
Having nearly three quarters of the world’s oil production covered by this tentative freeze plan is no small feat, but Novak’s announcement glosses over a number of grimmer facts for the world’s petrostates.First, Iran has notably not agreed to take part in the production freeze, and in fact is intent on boosting its own exports by one million barrels per day by the end of the year, now that Western sanctions are being lifted as part of the recent nuclear deal.Next, there’s no guarantee that producers will actually freeze their output, and little adherents to the deal could feasibly do to enforce (or even monitor) these limits.Third, freezing production won’t boost prices by all that much—remember that those prices collapsed because of a massive global glut, so keeping supplies where they are today won’t induce the kind of rebound these imperiled petrostates would like to see.Finally, U.S. shale producers notably won’t be part of this deal, and while they’ve been hurt by falling prices and are busy cutting spending to try and stay afloat, they’ve also been preparing for the day when prices tick back upwards by drilling but not yet completing thousands of wells, creating a “fracklog” of crude that will flood the market just as soon as it’s profitable to do so. That phenomenon will surely undercut the efforts of this proposed freeze.But from the petrostate perspective, there’s probably little harm in continuing to float this proposal. The headlines and attention that garners is already helping inflate oil prices to a two-month high—a small comfort, but one that doesn’t actually require these producers to do anything. There will be plenty more media attention paid to this freezing strategy in the coming weeks, too, as another summit is planned later this month that is expected to draw in more major oil producing nations.