The ‘freeze’ that failed to warm oil-market

But these are not normal times. The deal that actually wasn’t ended up whiplashing the already panicky market and leaving it hopelessly hopeful.
Brent crude had clambered above US$35 as February drew to a close, with NYMEX light sweet futures around $33 a barrel – both 25 per cent above the year’s lows touched on January 20 – though nothing had visibly changed on fundamentals.
What had changed was a lot of jawboning by a few oil ministers up-ending earlier convictions that collaboration between members and non-members of the Organisation of the Petroleum Exporting Countries to rein in supply was out of the question. By the end of the month, the can had been kicked down the road to a mid-March meeting of major producers flagged by Russian Energy Minister Alexander Novak.
The fact that crude-oil prices have more than halved since Opec’s landmark decision in November 2014 to defend market share at any cost, which left producer pockets across the globe in tatters, lent credence to the aforementioned deal among Saudi Arabia, Russia, Venezuela and Qatar at a meeting in Doha on February 16.
But the deal is hard to take seriously given that it is so conditional – other major Opec and non-Opec producers have to join in for the agreement to take effect, and so watered down – capping output at January levels rather than cutting it.
Bijan Zanganeh, the oil minister of Iran, which is aspiring to boost exports by 1 million barrels a day (mmbd) over the coming months, dismissed the deal as a “joke” in remarks published by the country’s ISNA news agency on February 23. That was barely a week after he hosted his counterparts from Iraq, Qatar and Venezuela and expressed support for the freeze proposal.
Russia’s Novak, who has been driving the collaboration initiative, suggested a freeze could take effect even without Iran’s participation. Major producers outside Opec that expect to be roped in include Mexico and Norway.
A freeze at January levels could remove 1.3mmbd of oversupply from the markets, Novak said, though he didn’t explain the math behind the number.
Some deduced it might mean an absence of the typical seasonal ramp-up in Saudi crude-oil production of up to 750,000 barrels a day in order to meet increased demand from power production at home during summer months. But that would leave the kingdom bearing the brunt of the cutback, something hard to fathom, especially without political arch-rival Iran chipping in.
Opec’s second-largest producer Iraq, which hit a new high of 4.33mmbd in January, remained conspicuously silent on its plans.

Vandana Hari is Asia editorial director of Platts and a research scholar at the McGraw-Hill Financial Global Institute.