Oil prices have been plummeting since around June 2014 due to a global supply glut, resulting in diesel prices that were last seen more than 11 years ago. Recently, three Organization of Petroleum Export Countries nations and Russia proposed a deal that addresses the issue. So what does it all mean?
Saudi Arabia, Russia, Venezuela and Qatar have agreed to freeze production at January levels. According to the latest OPEC monthly oil market report, Saudi Arabia leads OPEC countries in production at more than 10 million barrels per day (mb/d), followed by Iraq at less than 5 mb/d. Venezuela lies near the middle (2.3 mb/d), with Qatar towards the bottom (0.655 mb/d).
With only two countries with significant production involved with the agreement, many analysts are wondering if this deal means anything at all. Tom Kloza, global head of energy analysis at Oil Price Information Service, is not optimistic about the agreement.
“It’s really not much of a deal,” Kloza told Land Line.
Kloza pointed out that neither Iraq nor Iran has agreed to any production freezes. Both countries have experienced rapid growth in production, especially Iran which recently had sanctions lifted. Furthermore, freezing production at January levels does very little to address concerns of a supply glut brought on by record-high production levels. Saudi Arabia’s production increased by more than 44,000 b/d in January compared with the previous month.
“This is just a lip service agreement that establishes nothing and ignores the issue of what to do about rising Iraqi and Iranian production,” Kloza said.
Stock markets were not fooled by the announcement on Tuesday, Feb. 16. Prices for WTI and Brent crude oil settled lower on Tuesday than the last settled price on Friday, Feb.12 on the New York Stock Exchange. Kloza expects prices to remain between $21 and $40 for the first half of the year. Increased demand and a lack of investments in new fields are expected to send prices upward from around 2017 to 2020.
Until then, don’t expect much from the recent agreement between the three OPEC countries and Russia.
“It’s the equivalent of the kids wanting a dog and the father telling them ‘Ask your mother,’” said Kloza.
Sign up for eNews here and get all of Land Line’s headlines, features and special reports delivered to your inbox on a daily basis, absolutely free. All it takes is an email address.
Copyright © OOIDA