Oil Deal in Doha – 4/15/16

After prices crashed more than 70% from $100 a barrel in 2014, US oil companies drilling shale were the ones hurt the most by the supply-demand mismatch. U.S. output is expected to drop by 725,000 barrels a day in 2016 as credit ratings cuts hamstring debt payment efforts by debt-laden drillers.

Leniency last year is being followed by strict cuts as lenders acknowledge the likelihood of long term price weakness, how much value drillers’ assets have lost, and pressures to reduce their exposure to the energy industry. In 2016, lenders have already reduced credit extended to oil and gas companies by 12%. Oil prices are expected to recover to $50 a barrel later this year as hundreds of the struggling firms are forced to idle rigs amid bankruptcy. According to the IEA, global oil markets will “move close to balance” in the second half of 2016 as lower prices take their toll on high cost producers like shale and oil sand focused extractors. The agency estimates a decline in the oil supply surplus to 200,000 barrels a day from 1.5 million from the first half of 2016 to the next, the agency said in a report on Thursday.

iea oil surplus

In the mean time, the price of oil continues to fluctuate thanks to speculation over a possible agreement between OPEC and Russia; however, commitment by Iran to boosting production by hundreds of thousands of barrels a day will likely sink the deal or at least render it impotent.

In an effort to regain market share post-sanctions, Iran has gone so far as to sell oil at a discount. The discount comes at the expense of Saudi Arabia, OPEC’s largest producer and Iran’s primary geopolitical rival, the leaders of which have said its participation in a freeze is contingent on Iran also agreeing to maintain current levels of production. High ranking members of the Iranian government have been hostile to the freeze talks for a while now. Unsurprisingly, Iranian officials refuse to curb already shriveled output. Iran has not yet committed to sending officials to the Doha meeting where Russia, OPEC, and other major oil producers will discuss a possible output freeze.

The meeting, held in Doha, Qatar on April 17, will include Russia, Saudi Arabia, Qatar, Venezuela, Algeria, Angola, Azerbaijan, Colombia, Ecuador, Indonesia, Iran, Iraq, Kazakhstan, Kuwait, Mexico, Nigeria, Oman and the United Arab Emirates. It will not include major producers Norway, Canada, China, Brazil and the United States. Discussions between Russia and Saudi Arabia suggest that the meeting will result in an agreement to cap output even without Iran, but many attending producers are already producing at near maximum levels. In other words, the talks are likely to be a morale victory, not a material one. Market sentiment after the talks will how us how effective playing with emotions can be.

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