Oil: April and the Iranian Exemption

Published on March 14, 2016
SGH Insight
First, we cannot emphasize enough that the Iranians were already exempted from the oil output freeze, by both of the key oil powers, Saudi Arabia and Russia, until a revisit on the OPEC quotas later this year.
Second, when the Russian oil minister noted that “within the framework of major oil producers, Iran is liable to have an exclusive way for increasing its oil production,” he was referring specifically to the understanding as we have been writing since January. And third, the freeze meeting is all but certain to be moved to Doha from Moscow, at a date still to be set, but probably in the first half of April.
Market Validation
(FT 3/16/16)

Alexander Novak, Russia’s energy minister, said on Monday after talks in Tehran that Iran had the right to boost output after years of restrictions against its oil industry.
“Producers agree Iran’s exports will remain gradual and lower than expectation,” said one Gulf Opec delegate.

Some of the world’s biggest oil producing countries will meet in Doha next month to discuss a freeze in output, Qatar’s energy minister said on Wednesday.
Mohammed Bin Saleh Al-Sada, also president of the Opec producers’ group, said in a statement that the April 17 gathering of ministers “comes as a follow-up to the meeting that was held last month in Doha”.

A provisional deal has helped to support prices, up 20 per cent in the past month alone. On Wednesday the price of Brent crude, the international benchmark, rose 59 cents to $39.33 a barrel by 11am in London.

Three essential points to clarify the politics of the efforts to broaden the oil output freeze in the wake of the meeting in Tehran between Russian oil minister Alexander Novak and his Iranian counterpart Bijan Namdar Zangeneh:

** First, we cannot emphasize enough that the Iranians were already exempted from the oil output freeze, by both of the key oil powers, Saudi Arabia and Russia, until a revisit on the OPEC quotas later this year (SGH 2/16/16, “Oil: Another Step Towards Output Deal”). The headlines out of Tehran about Iran refusing to participate in the freeze were entirely driven by the domestic politics in the wake of the election victories of the reformists under President Hassan Rouhani over the hardliners led by the Ayatollah Ali Khamenei and the Revolutionary Guard, who were facing attacks from some of their supporters for “sacrificing the gains of the revolution to the Saudis” in limiting oil output increases.

** Second, when the Russian oil minister noted that “within the framework of major oil producers, Iran is liable to have an exclusive way for increasing its oil production,” he was referring specifically to the understanding as we have been writing since January (SGH 1/21/16, “Saudi Arabia: Lending a Hand”) that Iran would be phasing in higher output through the year rather than trying to rush more crude to market in a way that would be disruptive to prices. Iran, in fact, does not have the capacity to increase its oil output that would come close to hitting an eventual 4 million bpd target output any time soon.

** And third, the freeze meeting is all but certain to be moved to Doha from Moscow, at a date still to be set, but probably in the first half of April. The reason for the move, to which the Russians have agreed, is primarily the resistance building among the Saudis, the Gulf oil countries, and apparently some of the other oil producers, to the heavy-handed way the Russians were trying maximize political gains as host of the meeting. Doha is seen as far more neutral, and may include co-hosts in addition to Qatar, and by being a short flight from Tehran, was meant to keep the door open to a last minute Iranian participation.

Two other points:

Novak is essentially noting the obvious, that the key oil producers will still need to iron out a means of monitoring the freeze in oil output. It has to be said, though, it won’t be all that difficult for most of the participants since they are already at their maximum output levels, save for Saudi Arabia. But adherence to the freeze, however low the bar may seem, is still crucial to the Saudi participation in the freeze. As we noted previously (SGH 1/29/16, “Saudi Arabia: Building Towards Firmer Oil Prices”), it is a critical step in the “trust-building” process the Saudis view as essential before any outright collective cut in oil output is possible later this year.

Novak likewise echoes the Saudis in his estimate of the current oil supply surplus at 1.5 million bpd. Some of this should be slimmed down in the freeze, in part due to the diversion of Saudi output to meet higher domestic demand in the summer, and the maintenance period. But ultimately, in addition to an expected uptick in demand to help soak up the surplus, some cuts in output later this year is almost certainly going to be needed to get to a new equilibrium in oil prices around the $50 mark.

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