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A freeze will not provide price support

Published Monday, February 22nd, 2016

Last week we saw OPEC/non-OPEC make a second step towards a production agreement. The first step was the lobbying process led by Venezuela that something needs to be done on the supply side. Venezuela has been lobbying for months without success. The breakthrough has come because oil prices have been at painful levels for much longer than expected and the forward supply/demand numbers suggest that the pain will last for at least another year.

To call last week’s meeting a breakthrough is probably an exaggeration. Saudi Arabia and its OPEC allies have always made it clear that they were open to an agreement on production as long as it involved the participation of OPEC and non-OPEC producers, without ever making it clear exactly who they were referring to other than it had to involve the world’s largest producer, Russia. Nevertheless it was an important step to persuade the oil ministers of Saudi Arabia, Russia, Qatar and Venezuela to meet together face to face to discuss what can be done.

We now have some clarity about what we can expect in the near term. The most important conclusion is that there will not be a production cut, at least not before OPEC’s next scheduled meeting in June, and probably not then either. The very best that can be hoped for is a production freeze at January levels, which for OPEC as a group as well as Russia were at very close to record highs in the modern era. We also know that the four countries that met at Doha, plus Kuwait, UAE and Oman are willing to participate and that Iran will not participate. Iraq significantly has not declared its hand calling the Doha meeting and conclusions “a step in the right direction”.

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Posted by David Hufton