Saudi Arabia and Russia agreed to freeze production at January levels on February 16th in the first coordinated effort to stabilise 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 February 12th. 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 (mmbbl/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 production capacity has already grown by some 400 thousand barrels per day (kbbl/d), with a further 300 kbbl/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 mbbl/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 prioritise market share. Conversely, production cuts from non-OPEC countries are likely to determine the direction of the market through 2016. According to the IEA, Non-OPEC supply contracted by 0.5 mmbbl/d in January 2016.
Given demand growth expectations of only 1.2 mmbbl/d this year and an output freeze which is unlikely to stick, any potential oil price recovery in late 2016 continues to rest on the US’s shoulders.