Doha oil meeting: Freezing output at current levels is 'not a game changer'

Published April 17th, 2016 - 10:05 GMT
Oil prices are driven by perception and speculation, global economic activity, the strength of the US dollar relative to other currencies, and geopolitics. (File photo)
Oil prices are driven by perception and speculation, global economic activity, the strength of the US dollar relative to other currencies, and geopolitics. (File photo)

The oil producers meeting in Doha is not expected to produce a positive outcome in ridding the glut of supply in the global crude market, experts told Anadolu Agency on Friday.

After months of talks, the world's top two crude producers, Saudi Arabia and Russia, will finally meet in Qatari capital on Sunday, and will be joined by a dozen of other oil producing countries, to discuss freezing individual output levels in order to increase low oil prices.

Freezing oil production levels, however, are not expected to trim the oversupply in the global oil market, and would not elevate the plummeted prices in the long-run, according to experts.

"Freezing output at current high levels would simply maintain the excess supply that is now in place and, as such, would not be a game-changer," Thomas Pugh, a commodities economist at London-based Capital Economics said.

T. Homer Bonitsis, associate professor of finance at Martin Tuchman School of Management in New Jersey Institute of Technology said "a 'Doha Accord' by OPEC and non-OPEC oil producers would be dead on arrival ... such a freeze would not alleviate the current oil glut."

"The market will quickly understand that the agreement cannot be effectively implemented, given the large number of countries and their divergent interests," he added.

For small and medium-sized producers, the aim is to have higher oil prices since their revenues are highly dependent on oil sales. Although this is also true for the economies of Saudi Arabia and Russia, the two countries are also concerned about losing their share in the global market.

The Saudi position

The Kingdom had refused in OPEC's last three biannual meetings to cut its output to protect its market share -- a move which was in contrast to its past actions where it had carried the burden of the entire cartel by cutting its individual production alone.

"Saudi Arabia’s refusal to be the swing producer was in part to defend its market share, but more to punish Iran and Russia for their involvement in the Middle East regional conflicts, in addition to forcing marginal producers, mainly onshore North America and deep-water out of business," said Fadel Gheit, managing director and senior energy strategist at New York-based financial services and investment firm Oppenheimer & Co. Inc.

The Saudi strategy since OPEC's November 2014 meeting was to let prices sink, so high-cost U.S. shale producers would be driven out of the market, and the absence of their output would trim oversupply in time to push prices higher.

However, U.S. oil producers proved to be resilient against low prices, as domestic crude production in the country fell only by 600,000 barrels a day to just below nine million barrels per day -- a level still high compared to the pre-2008 shale oil revolution era when U.S. oil output had averaged five million barrels a day.

US crude is here to stay

"Shale production is here to stay, but will remain below the 2015 peak until production costs decline further. Technology could accelerate this process and OPEC must incorporate shale production in their calculations ... Saudi Arabia realized that several other large producers will not back down," Gheit said.

And those calculations are crucial for Saudi survival. Gheit stressed that the Kingdom is running a budget deficit of more than $100 billion every year due to low oil prices.

"Although its [Saudi] foreign reserves can bridge the budget gap for four to five more years, a prolonged oil price war could destabilize several countries in the Middle East and result in regime changes," he explained.

Bonitsis said OPEC is not relevant today in setting oil prices.

"Non-OPEC production is too significant. In particular, the U.S. is a major oil producer," he added.

How will the market react to the meeting?

With the assumption that the talks will be concluded successfully, the global oil market has been pricing in the Doha meeting for weeks, as Brent crude reached its peak this year at almost $45 per barrel -- a level which was last seen in December 2015, before prices sunk to their lowest level in 13 years in January this year below $30 a barrel.

However, the recent upward trend in prices can be misleading, since the producers on Sunday are expected at best to pledge a production freeze and not production cuts.

"A favorable communique out of Doha this weekend could cause a positive spike in the price of oil, but such a movement should be savored quickly -- it will evaporate in a nano-second," Bonitsis said.

"For as long as global economic growth is anemic, it will be a tenuous endeavor for the oil market to recover. Indeed, there should be concerns that a failed 'Doha Summit' could send oil prices significantly down," he warned.

Bonitsis highlighted the low global crude demand due to the slowdown around the world - another major factor for the price slump, and added that economic growth is needed to raise the prices.

"Only robust economic growth in Asia and Europe will ameliorate the global oversupply of oil and hence lead to reasonable stable petroleum prices. In the absent of this, volatile low prices will continue to be the norm," he said.

Gheit emphasized that Saudi Arabia hopes global oil demand will recover, which could balance supply and demand in the market, but this would take time. He also pointed to other factors that play a role in prices.

"Oil prices are driven by perception and speculation, global economic activity, the strength of the [U.S.] dollar relative to other currencies, and geopolitics," he said.

"We believe the sustainable oil price is close to $60 per barrel," Gheit concluded.

By Ovunc Kutlu

© Copyright Andolu Ajansi

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