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Crude Economics
Is There an Oil Freeze in the Near Future?

An output freeze was the talk of the oil industry world this spring, but in the end all of that speculation and rhetoric failed to produce an actual agreement. At the last minute, the Saudis scuppered a deal that would have set upper limits on production for suppliers both within OPEC and without, as Riyadh chafed at the fact that Tehran refused to sign on. But now that Iran has boosted its output nearly to pre-sanctions levels, it no longer looks like the major roadblock to a freeze agreement that it once was. Unsurprisingly, that has some of the more cash-strapped petrostates salivating at the thought that a freeze could actually occur this fall, and help set a floor to an oil market that recently has started to look bearish once again. The WSJ reports:

Iran’s production has crept back up to 3.6 million barrels a day, about 180,000 barrels a day above its levels in April and almost 600,000 barrels a day higher since world powers lifted economic restrictions on the country over its nuclear program in January. That brings it within reach of the 4 million to 4.2 million barrels a day that Iranian officials said they would require before agreeing to a freeze. A spokeswoman for Iran’s oil ministry declined to comment on whether Iran could now consider joining an output freeze. […]

Breathing life into talk of an output freeze is also getting support from OPEC’s traditional powerhouses in the Arab Persian Gulf. Saudi Arabia and its Gulf allies will support any cooperation between OPEC and nonmembers as they don’t want prices to fall further, according to people familiar with the kingdom’s policy. […]

Much would depend on whether Russia participates. Russian officials were angered when Saudi Arabia suddenly switched its position in Doha and opposed a deal, scuttling weeks of negotiations.

Of course, Iran’s cooperation is by no means guaranteed at this point, and even if it were, there’s still the matter of convincing other producers—Russia and Saudi Arabia being the biggest and, therefore, most important among them—to accept limits. But, for the sake of argument, let’s say this group of OPEC + Russia + other miscellaneous state oil companies manages to find common ground (increasingly rare real estate for petrostates these days) and sign on to a production freeze agreement. What then?

Markets would likely react and prices would creep upwards—after all, they climbed this spring based purely on discussions of a potential freeze. But it’s hard to imagine this would produce the sort of rebound that petrostates are so dearly hoping for, because keeping crude flows as they currently are will do little to undo the glut that precipitated the price collapse. At its core, the freeze is about damage limitation for suppliers that have been rocked by bargain prices, more than it is a lasting solution to the fundamental problem, namely that petrostates are running fiscal deficits now that crude has fallen from its $100+ per barrel level.

There may be a freeze in the offing later this year, but even if it happens, it’s unlikely to solve the deeper issues that many producers face in today’s oversupplied oil market.

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  • rheddles

    Good luck. They’ll just open the field for the frackers.

    • f1b0nacc1

      Failed blue-model, Tele-commuting frackers perhaps?
      (sorry, couldn’t resist)

      • rheddles

        Heh.
        (me either)

  • Frank Natoli

    For 40 years, OPEC controlled world oil supply and thus prices, in great part because Democrats strangled U.S. production, in coastal waters and ANWR. Democrats said America could not drill its way to lower prices because we would have to out produce all of OPEC. They were lying, as hydraulic fracturing on private land proved.
    Thankfully, the electorate has decided to elect a woman who with her cell phone and pen will strangle fracking and put OPEC back in control.
    Thank you, Democrat voters!

  • Kevin

    I think the Russians made a grievous error in supporting a deal with Iran. The Russian state at its heart is one that use petro-profits to support the regime. Opening to Iran brought large increases in Iranian production, provided huge increases in financing for their adventures which in turn convinced the Gulf Arabs to fight for market share resulting in the oil price collapse which is the greatest threat to Putin’s regime.

    Putin seems quite clever at tactics but I’m less convinced he is as capable at formulating a long term strategy.

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