Tuesday February 16, 2016
It is yet another week in which rumors of an OPEC cut swirled around the oil markets. The difference this time, however, is that the rumors are backed up by a bit more substance.
OPEC-Russia deal. OPEC confirmed on Monday that the energy ministers from Saudi Arabia, Russia, Qatar, and Venezuela met in Doha, news that sent oil prices up. On Tuesday, the group emerged with a deal: a freeze on January production levels, but not an outright cut. The deal would also be contingent on all OPEC members agreeing to the plan.
Despite the news, the deal falls short of what the oil markets had been hoping for. Moreover, it is also unclear whether or not all parties will sign on. On the one hand, a production freeze is unambitious – it merely freezes output at near record levels for most countries. Worse, even a weak deal faces hurdles to implementation. The biggest outstanding question is whether or not Iran would agree to limiting its production just as it finally shook off years of sanctions. Iran had previously announced plans to increase production by 500,000 to 1 million barrels per day (mb/d). It is hardly in its interest to cap production now.
Even if Iran adheres to the deal, the production freeze may not ease the glut. Judging by the reaction in the markets – oil prices staged a brief rally but the gains were quickly erased as reality set in – oil traders are disappointed with the outcome.