EC Another Oil Freeze Fiasco?

Iran’s Position on this Oil Freeze

Some OPEC members believe that conditions have changed enough over the past six months that the idea of a production freeze is now realistic. This is wishful thinking. Iranian production is higher, but it is not yet at pre-sanctions levels. It seems Iran will not be able to push production higher and may not even be able to sustain current levels much longer. Iran’s financial situation is still dire and the country needs more oil revenue. The only way they can get that kind of oil revenue is to increase Iranian production at the expense of others. A production freeze will not accomplish that goal, so Iran has no incentive to agree.

Saudi and Russian Oil Freeze (Non) Interests

Saudi Arabia has no incentive to agree to freeze production, particularly as it just cut the price of the Arab Light crude oil to Asian customers. The country is not facing a financial crisis of any severity. Saudi Arabia can continue to make more money per barrel off oil it sells than any other nation. Low prices also feed Saudi Arabia’s burgeoning refining and petrochemical businesses. The Kingdom can continue to spend cash reserves to fund its government and obtain low interest loans for major development projects for several years.

Russia, the largest non-OPEC player, is always a wild card when it comes to agreements with OPEC. The country had reneged on oil production deals before. Even when Energy Minister Alexander Novak says Russia is interested in participating in oil production freeze talks, Russia’s word cannot be trusted.

OPEC’s Take on Oil Freeze

OPEC’s current president, Qatari energy minister Mohammed al-Sada, is being diplomatic when he said that, “OPEC continues to monitor developments closely, and is in constant deliberations with all member states on ways and means to help restore stability and order to the oil market.” This does not mean OPEC is any closer to an oil production freeze than it was last week or last month. Al-Sada is simply towing the party line, and investors should not take his statement as an indication of any action. The bottom line for investors should be to remember the lesson from Doha: Unless all of the big oil producing nations – Saudi Arabia and Russia, along with Iraq and Iran (to some extent) – truly believe that an oil production freeze is in their country’s best interests, it will not happen.

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Chee Hin Teh 5 years ago Member's comment

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