Russia, Venezuela and a clutch of Gulf states are trying to boost oil prices by enforcing a production freeze. Good luck with that
Yesterday, as part of my day job at Infrastructure Investor, I reported that European fund manager Antin was looking to sell its stake in Pisto, an oil storage group. The deal could be big: sources I spoke to thought the sale could value the business at more than €1.2 billion, based on recent transactions in the sector.
That’s not surprising. Oil consumption is not keeping up with the current production glut, caused by the rise of shale in the US and record output by Opec members. The surplus has to be stocked somewhere. With prices down two-thirds since August 2014, investors and consumers also think it’s a good time to build up reserves; traders would rather store the stuff and wait for better days. All this is making companies owning oil tanks a rather hot ticket.
Their fortunes could be about to turn, however. Or not.
On Tuesday Alexander Novak, Russia’s energy minister, said an oil production ‘freeze’ would be effective even without Iran’s participation. Novak was referring to an agreement Russia and Saudi Arabia reached in Doha last month that would see them limit their respective output to January levels. Both have since convinced Venezuela and Qatar to partake in the deal. Countries willing to freeze production now represent 75 percent of the world’s total output – a “critical mass”, Novak believes.
The deal’s aim is to drive prices back up to about $50 to $60 a barrel (from about $35 today). Oil producing countries are indeed in pain: Iraq, Saudi Arabia and Algeria are set to record double-digit budget deficits this year, while recession will hit Russia and Venezuela hard. This has prompted some to cut welfare budgets, slash subsidies and cancel investment programmes. It’s even pushing Saudi Arabia to consider floating its national oil company to raise cash (a move that would create the world’s largest public entity in the world).
But these are all individual initiatives. Much more powerful would be co-ordinating national policies to produce less. Simply talking about it, at a time when Saudi Arabia and Russia are at loggerheads in Syria, is therefore already progress. Riyadh’s change of tone is particularly remarkable: Saudi Arabia’s objective is to strangle US shale producers by keeping prices low, so any mention of capping output was previously anathema.
Whether an actual deal will be reached is far less sure. The initiative is largely led by Russia, which has a patchy record of actually cutting output after promising to do so. Opec members will be looking hard for hints of non-compliance once the deal is signed, as a result of which trust could quickly unravel. And it is not obvious Russia will be able to enforce it in the first place: the rouble’s collapse is having its oil companies scrambling to collect dollars by maximising exports.
It doesn’t help that Putin’s view on the freeze remains ambiguous. The Russian president has delegated the matter to the energy ministry without releasing an official statement endorsing the deal. And he is apparently leaving room for Russia’s largest oil companies to flout it: “I would like to hear it from you directly, do you really support the minister’s proposal? What do you think about it?” He asked oil bosses last Tuesday at a meeting on the subject.
Putin’s ambivalence may not matter much. Even if it is enforced, a deal along what was agreed in Doha will probably fail to revive prices anyway: Saudi Arabia, Russia and Iraq were all producing at or close to record levels in January. Should Opec output simply remain flat, the International Energy Agency reckons stocks will continue building by 2 million barrels per day this quarter, further depressing prices.
And that’s all before Iran starts producing big time again. Tehran wants to crank up production to pre-sanction levels; it aims to increase output by another 500,000 barrels per day by August. Its officials recently described the suggestion that it freezes production as “ridiculous”.
What markets think of the Doha deal is not hard to guess. After rising a bit earlier this week, oil prices eased again today. But more may be achieved in June, when Opec meets again: by then everyone will know better what Iran can produce, how much the US is losing and the amount the world economy can consume. A more drastic cut could perhaps come on the table. In the meantime, don’t expect a tick up at the pump.