On Tuesday morning, news broke that several key oil exporters had agreed to freeze their oil output at January volumes. The group headed to Tehran, on Wednesday to discuss enlisting Iran in their agreement. Following that meeting, Iranian oil minister Bijan Zangresh said he supported the agreement, but did not think it would be enough to help buoy prices, nor did he commit to output changes.
The announcement of the plan has dominated financial and industry news this week, but – assuming the agreement expands to the rest of OPEC’s members – does it signal that the oil collapse nightmare could be over?
A poll taken today of people in Houston involved in the energy business doubtless would unanimously return that this deal was good news and that it would lead to better oil prices by the end of 2016, and possibly before. The only people who might disagree are those Wall Street commodity traders who are short (betting that oil prices will decline) on crude oil contracts.
The problem is that on Monday when rumors of a potential meeting between Russia and Saudi Arabia, the world’s top two oil producers, to discuss an accommodation to restore order to the oil market emerged, crude oil prices rose 7.9% to $30.76 a barrel. But when the news of the actual agreement hit the public airways, crude oil prices actually fell. Oil prices closed trading on the commodity exchange at $29.15 a barrel for a decline of -5.2%.
What gives? A deal that would ease the oversupplied oil market, and thus offers hope for a recovery of the oil and oilfield service industries, should have led to higher oil prices.
The drop in oil prices signaled that the investment community had expected a more substantial agreement – a cut in output rather than a freeze. The market is worried about how Russia and Saudi Arabia will accommodate Iran, which is just now beginning to ramp up its production and crude oil exports now that Western sanctions have been ended.
In the past, when OPEC set a cap on the collective output of its members, there were often exemptions agreed to for certain countries that were encountering production issues. Will Iran fall into such a category? A bigger question, with all producers suffering financially due to the year-long low oil price environment, is whether they will adhere to their production caps at all.
If one believes in conspiracies, we will suggest one for your consideration. Saudi Arabia and Russia are on opposite sides of the struggle in Syria. Saudi Arabia is battling Iran for leadership of the Middle East region. America has retreated from influencing Middle East geopolitics, apparently abdicating that role to Russia. How about a deal where Russia and Saudi Arabia eventually agree to cut their output, Iran is allowed to produce more oil, but – importantly – Russia guarantees that it will police Syria and Iran and reduce their sponsorship of anti-Sunni (Saudi Arabia) terrorism?
Oil prices would rise. All three countries would reap higher incomes, along with the rest of the OPEC members. Saudi Arabia’s military expenses would fall because they won’t have to continue fighting Iran’s surrogates in Syria and Yemen. Most importantly, the boot would come off the throat of the oil industry.
The views and opinions expressed in this blog are the author's and not necessarily those of WorkBoat.