Countries agreeing to freeze have little capacity to add
Oil prices have recovered over the past weeks as news about a coordinated production freeze between OPEC and non-OPEC members has given the commodity a more stable footing in the market. Both U.S. and international crude benchmarks WTI and Brent are up over $40 per barrel as markets hope that cooperation between a group of nations representing 73% of global production might bring supply and demand into balance.
The news has been seen in a positive light by markets, but the IEA called the coordinated production freeze “rather meaningless.”
“Amongst the group of countries [participating in the meeting] that we’re aware of, only Saudi Arabia has any ability to increase its production,” said Neil Atkinson, head of the IEA’s oil industry and markets division, reports The Guardian.
“So a freeze on production is perhaps rather meaningless. It’s more some kind of gesture which perhaps is aimed … to build confidence that there will be stability in oil prices.”
More production is expected to come online from Iran in the months to come as the country looks to regain lost market share since the lifting of international sanctions, and Iran has state repeatedly that it does not plan to join the freeze until it has reached at least 4 MMBOPD of production.
Production from Iran so far has been modest, with around 300 MBOPD of additional supply coming from the Islamic Republic since the end of sanctions. Atkinson believes that Tehran’s output could increase by the same amount by the third quarter of this year.
Libya, which also has considerable spare capacity as it struggles to keep production up amid a civil war, has also said that it will not join the freeze.
Iran can join later – OPEC Secretary General
OPEC Secretary General Salem el-Badri said he is hopeful about the upcoming meeting, and that Iran can always join a production freeze later.
“I hope the result of the meeting will be positive,” said el-Badri. “[Iran is] not objecting to the meeting but they have some conditions for the production and maybe in the future they will join the group,” he said.
He went on to say that he hoped prices had bottomed out, and that the real concern now was the global stock overhang.
“If we are able to get rid of this 300 million barrels, the overhang, then the price will come back to normal.”
Atkinson with the IEA said the group believed prices had likely found a floor, but that they may not rise far in the near-term.
“We think the worst is over for prices … Today’s prices may not be sustainable at exactly $40 a barrel, but in this mid-$30s and upward range, we think there will be some support unless there’s a major change in fundamentals,” Atkinson said.
