Doha Aftermath – 4/19/16

Leading up to the ineffectual Doha freeze talks, the IEA noted that producers are pumping at near record rates except for a few nations, the most notable being Iran. The recently unsanctioned major, Middle-Eastern country declined to send a representative to the talks on the grounds that any curbs on oil output would amount to self-sanctioning. The agreement was scrapped as Saudi officials, on the urging of Saudi Arabia’s Deputy Crown Prince, demanded it be dependent on the future inclusion of Iran; it was chalked up as a casualty of the economic and political rivalry between the two nations.

Losses in the American market to U.S. shale drillers forced Saudi Arabia to rely more on European and Asian markets which are now threatened by the return of Iran to international oil markets. To protect its market share Saudi officials abandoned its old strategy of limiting output to prop up prices and pumped at record levels. This new direction led to the current price collapse. Credit ratings of many oil-producing nations have already been downgraded during the oil glut as a result. Caring more about protecting its market share amid the revival of Iranian exports, Saudi Arabia increased production to an all-time high of more than 10.5 million barrels a day and cut prices to Asian customers to compete with Iran during the glut. The country has even gone so far as to give discounts in a price war with Iran to match their many proxy military engagements in the Middle East.

Saudi Arabia and Iran represent two sects of Islam, respectively, Sunnis and Shiites, and are regularly on opposing sides in regional conflicts like Syria’s civil war and the unrest in Yemen. The Saudi Kingdom cut off diplomatic ties with Tehran this year after its embassy was mobbed in retribution for the execution of a Shiite cleric.

Though most believed the talks would at least result in a symbolic freeze agreement, there are many reasons why Saudi Arabia would desire a total failure for the Doha talks. Firstly, if the nation committed to freezing production, then its hands would be tied if it wanted to protect market share as Iran increases exports. Next would be the kingdom’s desire to avoid a sharp increase in oil prices. Propping up prices would only keep rival suppliers in the U.S. alive; it would be completely counter to the original plan of using a competitive advantage in low cost extraction to force U.S. shale drillers into bankruptcy. The Doha meeting could have also been an attempt to force Russia to choose between higher oil prices and supporting Iran.

In the end, any deal excluding Iran was never going to alter the supply-demand mismatch. Producers agreeing to “only” produce at current, record levels was more to show how the countries involved were capable of a unified response. A goal that they failed to accomplish. The next possible chance for an agreement comes on June 2 during the scheduled bi-annual OPEC meeting.

The Doha talks floundered, but strikes in Kuwait that cut its oil output by over half for several days were a well-timed distraction for markets. Kuwait sought to restore 1.7 million barrels a day worth of crude production, an amount exceeding the current global surplus, while the state refining company slowed operations at its three oil-processing plants. Kuwait oil workers ended the strike in OPEC’s fourth-largest producer after three days when the government refused to negotiate while the walkout lasted. The workers, protesting cuts in pay and benefits amid the global glut of crude, returned to work and a quick restoration to full capacity is expected with little in lasting effects. The strikes like other unexpected disruptions to supply in Nigeria and Iraq were temporary cuts in a market needing permanent ones.

The only substantial reductions in output are being made in U.S. onshore oil production. U.S. crude production fell below 9 million barrels for first time in 18 months and the EIA cut its 2016 output forecast to 8.6 million barrels a day from 8.67 in March, according to its monthly Short-Term Energy Outlook. The agency reported that operators might be unable to capitalize on rising prices with their weak balance sheets, lack of banking industry support, and manpower losses during bankruptcies expected this year. Still, the shale boom surprised everyone once and the preponderance of pre-drilled wells, rigs, and the quickness of starting up in shale oil relative to traditional and offshore oil, could mean a unexpected revival that could keep prices even lower for even longer.

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