Crude Economics
The IEA Doesn’t Think Much of the Petrostate “Freeze” Plan

Most of the world’s biggest petrostates are planning to meet in Doha next month to moot a plan to freeze their production at current rates. Cutting production to help set a floor to plunging prices hasn’t been in the cards this most recent cycle, as producers have been unwilling to reduce their own output only to see another supplier step in and take their place. But if reducing is impossible, the next best thing for these producers would be to at least cap their collective output, and so far Saudi Arabia, Russia, Venezuela, and Qatar are all on board, provided others join them. However, the International Energy Agency (IEA) is pouring cold water on this strategy, as Reuters reports:

“Amongst the group of countries (participating in the meeting) that we’re aware of, only Saudi Arabia has any ability to increase its production,” said Neil Atkinson, head of the IEA’s oil industry and markets division, at an industry event.

“So a freeze on production is perhaps rather meaningless. It’s more some kind of gesture which perhaps is aimed … to build confidence that there will be stability in oil prices.”

Libya has joined Iran in snubbing the initiative, and the absence of the two OPEC producers – both with ample room to increase output – would limit the impact of any success in broadening the freeze at the April meeting.

An OPEC delegate said this week that the Saudis would still be willing to freeze output, even if Iran doesn’t join the plan (Tehran has repeatedly insisted that it intends to boost output by as much as 1 million barrels per day by the end of this year as it looks to return to pre-sanctions levels). But with Libya also ducking out of this plan, it will be harder to convince Riyadh to impose limits on its own production—and perhaps even more difficult to monitor whether or not it’s doing so.

Oil has risen in recent weeks back above $40 per barrel, thanks in no small part to the very public discussions over this freeze strategy. As we’ve pointed out before, that may be the most these petrostates can hope to produce—a small bump in prices based merely on talking about what they might do—because, in the end, the strategy looks to be full of holes.

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