Eighteen OPEC and non-OPEC nations, including Saudi Arabia and Russia and representing over 70 per cent of world oil supply, met in the Qatari capital Doha on Sunday 17 April but were unable to finalise an agreement to freeze oil production at January 2016 levels.
Iran did not attend the meeting – stating that it was unwilling to limit its production at January 2016 levels when sanctions on the country had only just been lifted – and Saudi was unwilling to join an agreement that did not include a freeze of Iranian production.
Performance of index over 2yrs
Source: FE Analytics
Hence no deal. The meeting lasted much longer than expected and Qatar's energy minister Mohammed al-Sada told reporters: “We concluded we all need time to consult further.”
Discussion in the lead up to the meeting centred on whether or not Iran would participate in a production freeze. Reasonably, in our view, Iran have maintained the position that they should be allowed to restore their production to pre-sanction levels.
As we have pointed out for some time, coherent decision making within OPEC is complicated by the current production picture, and the amount of over/under production versus each country’s implied quota.
Latest figures for March 2016 are shown below, which imply that Iran are still ‘under-producing’ by nearly 400k barrel per day, despite having raised their production from 2.8m barrel per day to 3.2m b/day since January.
Source: IEA; Guinness estimates (March 2016)
We believe that, privately, Saudi would understand and recognise Iran’s stance over this issue, but publically, they need to maintain a different view.
In terms of sentiment, this news will clearly be a short-term negative for crude oil prices and energy equities. Brent oil is down just under 5 per cent on the news, at $41 per barrel, and down 10 per cent from its recent high of $45 per barrel.
Short-term sentiment towards energy equities has also turned negative, with Asian energy stocks down 2 to 3 per cent as we write this and European energy equities down similar amounts. We would expect to see further liquidation of long oil futures positions that have built in recent weeks – in expectation of a freeze agreement – putting some pressure on price.
Brent is still up nearly 50 per cent from its lows earlier in the year and we don’t expect it to retest these lows post the meeting. As we see it, the crude oil market just got a bit too optimistic and got ahead of itself.
Performance of index in 2016
Source: FE Analytics
The outcome of the Doha meeting results in no real change in outlook for us – and there would not have been even with a supply freeze agreement. The major attendees at the meeting were all producing at or close to record high levels at end of January anyway – and Iran and Libya, the two supply ‘wildcards’ for 2016, did not attend the meeting.
We assume that the countries that met, as a group, will deliver approximately flat production from here anyway so our estimates for market rebalancing don’t really change as a result.
Qualitatively, it does remind us that there are strained relationships within OPEC and it lowers our expectations for any supply control agreement from the upcoming June 2016 OPEC meeting.
The world oil market is already rebalancing, we are confident of higher oil prices during 2016 even in the absence of a Doha agreement.
Just in the last few days, we have seen the US oil directed rig count fall again – now down at 329 from a peak of 1,609 – further US energy & petroleum companies file for bankruptcy protection and oil production workers have commenced a strike in Kuwait as a result of cuts in wages and benefits - Kuwait produced 2.85m barrel per day in March and Bloomberg reports that production has fallen to 1.1m barrel per day as a result of the strike.
These kinds of events reflect a world oil market that is suffering substantial discomfort at these oil prices. The natural rebalancing of world oil markets, predominantly through lower Non-OPEC oil supply, is ongoing and is the most important factor.
However, the rebalancing will not be a linear event, with small pockets of OPEC production that could re-emerge, and we expect volatility in both oil prices and energy equities for a while yet.
Conclusion – rebalancing continues
Crude oil and energy equities are likely to see further volatility as we progress through 2Q 2016. We must not let this volatility mask the fact that the market is rebalancing in the background, and that a Doha agreement was by no means a requirement.
The fact that 18 OPEC and non-OPEC members actually met (and got very close to an agreement) tells us that there is limited downside to oil prices from here and gives us confidence that oil prices are likely to end the year higher than where they are now and higher again in 2017, yielding a positive backdrop for energy equities.
The views expressed above are the Guinness energy team’s own and should not be taken as investment advice.
