The recent conference in Doha, the Qatari capital, convened by some eighteen major crude oil producers ostensibly to re-balance global supply ended without a consensus and was adjourned sine die. Conferees included both members and non-members of the Organization of the Petroleum Exporting Countries, OPEC, including Russia. Crude oil prices fell significantly in the immediate aftermath ― U.S. futures falling as much as 6.8% in Asian trading ― but recovered somewhat, on news that a sector strike in Kuwait substantially curtailed the country’s oil production. Fund managers that bet on a supply freeze may see their portfolios severely affected and may be poised for a selloff. According to Commodity Futures Trading Commission, net-long positions on both West Texas Intermediate and Brent crude oil grades increased significantly in the lead up to the Doha conference.

An earlier accord saw Saudi Arabia and Russia, two of the world’s highest-volume producers, as well as Qatar and Venezuela freeze output at January’s near-record levels. The deal, which left some investors sanguine about a consensus in the lead up to Doha, helped lift oil prices from about US$26 per barrel ― near twelve-year lows ― to just over US$40 per barrel. But the outcome of that conference was presaged. Any idea that the conference would be fruitful was always fatuous. Long-standing religious, ideological and geopolitical differences between two of OPEC’s highest volume producers, Saudi Arabia and Iran, scuppered the deal.

Three critical points are informative:

Questionable Exercise

There was an inherent futility in that Doha conference. The major oil producers were already producing at near-peak capacities, so freezing output at such levels would have done little to curb the massive supply overhang. 

Even if a supply freeze accord were reached, no protocol was envisioned ― neither is any in existence ― for monitoring producers’ compliance. Moreover, if breaches were determined, one wonders what sanctions would be prescribed and what capability there would be to enforce such. OPEC members routinely exceeded their production quotas when they were apportioned, and largely to no effective penalty.

Previous production accords in 2001 and 2008 were quick to fizzle out. In 2001 for example, Russia was widely blamed for breaching the accord brokered by Saudi Arabia, between OPEC and the non-OPEC producers Mexico, Norway and Russia. Given the exigencies of the day, it is doubtful if any output freeze accord in Doha would have been maintained.

OPEC

While OPEC, which currently boasts more than 40% of global oil supply has demonstrated its capacity to drive ― even if mostly downwards ― oil prices, there are clearly discordant tunes within, even within the de facto leader, Saudi Arabia. In the lead up to the Doha conference, conflicting positions between Saudi Arabia’s Minister of Petroleum and Mineral Resources, Ali bin Ibrahim Al-Naimi and the kingdom’s Deputy Crown Prince Mohammed bin Salman, left conferees nonplussed. Al-Naimi’s assurances to conferees, of a brokered accord were overridden by Salman’s insistence that Iran must first agree to a supply freeze, a condition Iran rejected outright. Russia’s oil minister, Alexander Novak, described Salman’s position as “unreasonable”.

While Doha was supposed to be a show of unity and purpose, it may have damaged the group’s credibility and exacerbated the growing discord among members. Venezuela and Nigeria are in the vanguard of countries calling for a production cut while the Saudis have resisted. Disagreement between a majority and Saudi Arabia over production levels had caused prices to slump. The abrogation of production quotas is attributable to that disagreement. However, with about 75% of the world’s crude oil reserves, more than 40% of supply (with a large spare capacity in Saudi Arabia) and by far the lowest production cost, it may be too early to write off the group.

Oil Prices

Growth in global crude oil supply has been outstripping that in demand over the past few quarters. The global oil imbalance ― excess of supply over demand ― increased to 2.5 million barrels per day (bbl/d) in 1Q 2016 from 2 million bbl/d in 4Q 2015, Bloomberg reports.

Russia in January for example, recorded her second-largest crude oil output ever; and Saudi Arabia has been producing at the top segment of her capacity. The Energy Information Administration, EIA, has projected a decline of about 700,000 bbl/d in non-OPEC supply (including “the shales”) for 2016; that value however is countervailed by Iran’s projected output, which was reportedly 3.3 million bbl/d in March and is expected to reach 4 million bbl/d in three months. Even the sector strike in Kuwait that has seen a significant proportion of the country’s output go offline would at best be short-lived.

Operators of crude oil storage facilities are currently doing brisk business. Such facilities are taken up as soon as they become available, as some traders are ― perhaps forced into ― betting on higher crude oil prices sometime in the future; but as demand for the facilities increases, their prices will most likely increase and at some point begin to exert downward forces on oil prices.

With no supply cuts in view, and the rather gloomy outlook for the global economy precluding any steep demand growth, the oil imbalance will most likely linger; and that implies an enduring low oil price regime.