As we close in on the April 17th “freeze” summit in Doha, where delegates from oil producing countries from around the world will try and reach a consensus on setting an upper limit to their output, interested parties are getting their last words in on where they see the market going. As the FT reports, Putin ally and CEO of Rosneft Igor Sechin sees prices going up:
“The oil price is growing. I think everyone is expecting the successful outcome of our work,” Mr Sechin said. “We will need higher price levels than $45 or even $50 a barrel.” […]
“US tight oil is decreasing despite preferential tax treatment,” Mr Sechin said. “Shale oil will struggle to spread as they don’t have such favourable conditions as the Americans have.”
Oil has already hit a 2016 high in trading this week as expectations grow for Sunday’s meeting, and Brent crude is now sitting comfortably above $44 per barrel—a far cry from the sub-$30 levels it hit back in January, though still not in the same ballpark as the $100+ echelon it occupied from January 2009 through June 2014. And, as Bloomberg reports, Sechin isn’t the only one that expects prices to continue to creep upward through the $40s:
“Everybody’s waiting for Doha, and it looks like globally people stopped believing in the dollar’s strengthening,” Dmitry Polevoy, the chief economist for Russia at ING Groep NV in Moscow, said by e-mail. “Technically oil may test $45-$47 levels, which will bring the ruble to 63-64 per dollar.”
$45 crude wouldn’t have been at all attractive to producers back in 2014, but in today’s market it could mean a world of difference for petrostates struggling with their balance sheets. So while Sechin raises good points about shale’s struggles outside the U.S.—and the industry’s recently declining production within America—it’s hard to take his word for it.
In fact, there remain a number of reasons to be skeptical about the freeze plan. To begin with, Iran has repeatedly said it fully intends to keep ramping up its own output this year as it seeks to return to its pre-sanctions production levels—perhaps by as much as one million barrels per day. Most analysts are skeptical of that claim, but any new production is going to enter a market in which supply already outstrips demand by roughly 1.5 million barrels per day.
But Tehran isn’t the only roadblock here. The structure of this plan is remarkably weak by OPEC’s historical standards, as it doesn’t involve any actual cuts in output, only limits on future increases. When you consider that Moscow and Riyadh have been pumping oil all-out in recent years, a freeze starts to look a lot less impressive—Russian output is currently operating at a 30 year high, and the Saudis continue to pump more than 10 million barrels per day, a big number even by their prodigious standards.
Finally, there’s the issue of actually monitoring and enforcing these limits. There already exists plenty of distrust between these major producers, every one of which is looking to protect its own market share first and foremost. When you combine that with the notoriously difficult task of accurately measuring output levels from various producers, you’re left with an environment in which consensus—even on such a watered-down production coordination strategy as this freeze plan—is painfully difficult to achieve.
This all adds up to a lot less than the fanfare that’s surrounding this strategy for the past two months, and while we can acknowledge how difficult (and frequently foolish) it is to try and predict the future of the oil market, we can also do a lot worse than heed the words of the famed oil historian and analyst Daniel Yergin who just this week declared that “[t]he era of Opec as a decisive force in the world economy is over.”