Douglas-Westwood, in today’s DW Monday report, discusses the production freeze that Saudi Arabia and Russia have recently agreed upon. On Feb. 16, these two countries agreed to freeze production at January levels, in the first coordinated effort to stabilize prices for 15 years. Expectations of an output cut were rife in the days leading up to the meeting in Doha, with Brent gaining 10.9% on Feb. 12. However, traders were left disappointed, given January’s near-record production levels and any output freeze contingent on other producers following suit. Consequently, there has been little change in day-to-day commodity price volatility.
Production has continued to soar in recent months. January saw a post-Soviet record high of 10.9 million barrels per day (MMb/d) pumped from Russian oil fields and both Saudi Arabia and Iraq broke output records in mid-2015. Despite high breakeven prices, other OPEC members such as Venezuela, Nigeria, and Angola have been forced to maintain output to sustain cash flows.
The chances of a sanctions-free Iran freezing production are slim. Recent reports from the Islamic Republic indicate that production capacity has already grown by some 400 thousand barrels per day (kb/d), with a further 300 kb/d to be added in the near future. DW’s Iranian oil production forecast (inclusive of condensate and NGLs) shows a 2016 average production rate of 3.9 MMb/d, with output rising above pre-sanction levels in 2017. Consequently, any production freeze is likely to thaw – and quickly – as Saudi Arabia continues to prioritize market share. Conversely, production cuts from non-OPEC countries are likely to determine the direction of the market through 2016. According to the International Energy Agency (IEA), non-OPEC supply contracted by 0.5 MMb/d in January.
Given demand growth expectations of only 1.2 MMb/d this year and an output freeze that is unlikely to stick, any potential oil price recovery in late 2016 continues to rest on the US’ shoulders.