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Crude Economics
Is Iran Already Sinking the Oil Output Freeze Plan?

Oil prices have been steadily rising in recent weeks, driven by the prospect of a petrostate plan to freeze production at current levels to help address the global crude glut that has led to a collapse of prices. Producers were reportedly set to meet in Russia ten days from now, but according to Reuters that meeting may now be off due to Iran’s refusal to get on board:

A meeting between oil producers to discuss a global pact on freezing production is unlikely to take place in Russia on March 20, sources familiar with the matter say, as OPEC member Iran is yet to say whether it would participate in such a deal. […]

Tehran feels it should be exempt from the agreement as it wants to recover market share it lost under Western sanctions. Kuwait said on Tuesday it will commit to the deal – if all major producers including Iran do so.

“They are not agreeing on the meeting. Why would the ministers meet again now? Iran says they will not do anything,” said an OPEC source from a major producer. “Only if Iran agrees, things will change.”

But Iran never was very likely to see eye to eye with the rest of OPEC and Russia. The WSJ reports:

President Hassan Rouhani’s chief of staff said Iran wouldn’t curb its output until it reached its pre-sanction market share. Iran produced roughly four million barrels a day before sanctions and currently produces less than three million barrels a day.

So, to recap: this production freeze plan is predicated on everyone jumping on board, and that certainly includes Iran. But Iran doesn’t want to hear any of this, as it’s in the middle of trying to recover the share of the global market it lost as a result of Western sanctions. Tehran hopes to boost output by one million barrels of oil per day by the end of the year, while the rest of the petrostates would want a commitment for it to stay at current levels. That’s a wide, wide gulf between those two positions, and it’s hard to see a compromise that would work for both sides.

This freeze plan has been deeply flawed from the offing, but we noted that simply by publicly discussing it, Russia and the Saudis were able to push prices up—even, it appeared, shifting the psychology of traders about the long-term. Now that the shaky underlying calculus of the strategy is casting the likelihood of a March 20th meeting into doubt, we’re seeing those gains made during this brief rebound start to melt away. Beyond all the rhetoric, the market is still heavily oversupplied, and no producer is going to willingly cede market share to help inflate prices.

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  • Andrew Allison

    Let’s cut to the chase: for any number of reasons, any talk of a production freeze is a chimera. Thus, barring a major interruption in supply, prices will stay low.

  • Blackbeard

    Both Hillary and Sanders have promised to shut down fracking and on this issue, if nothing else, I think we can trust them. Prices will therefore not stay low. Iran, Russia and Venezuela just have to hang on because help is on the way.

    What a strange world we live in.

  • Jacksonian_Libertarian

    “This freeze plan has been deeply flawed from the offing, but we noted that simply by publicly discussing it, Russia and the Saudis were able to push prices up—even, it appeared, shifting the psychology of traders about the long-term.”

    Markets constantly move up and down, and rationalizations are found for every price movement. But, when the scientific method is applied to these rationalizations, it is found that the same rationalizations have been used to explain price movements in any direction. While mass psychology can have an affect on price extremes, the law of supply and demand is always in charge, and the smart investor will follow the law.

    • Jim__L

      We’ll have a price that’s not so high as it might have been because Iran’s pumping more, and we’ll have a price that’s not so low as it might have been, because others are pumping less.

      Not exactly news.

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