10:15 25 April
10:13 25 April

Three obstacles that can thwart ‘Doha Plans’ - ANALYSIS

On April 17 in the capital of Qatar, Doha, the Organization of Petroleum Exporting Countries (OPEC) will hold a meeting, and all oil-exporting countries are expecting important results from this meeting. Azerbaijan too is expected to take part in the meeting. In fact, at the meeting there will be an important subject of discussion - freezing oil production at current levels. This step is aimed at increasing the prices on the oil market, because right now there is a surplus on the market, and for this reason the prices are low. Freezing production in the framework of certain quotas will eliminate this surplus, which in turn will give rise to prices. However, the scenario may face a number of obstacles.


First Obstacle


First of all, the meeting must result in an agreement on freezing the current oil output level, or slightly below. And this in itself will not be easy, because although the majority of oil exporting countries agree to this, there are also dissenters as well those whose position is unknown or partially known. Now there are two players whose position is unknown - Iran and Saudi Arabia. Iran has recently freed itself from years of embargo, and is thus uninterested in freezing oil production. Instead it is interested in an increase in production and sales. The Iranian side has recently issued two statements that can thwart the ‘Doha’s plans’.


Firstly, Iran announced that it is planning to bring the level of oil production to 4 million barrel a day by early 2017. This increase will take place gradually. That is, Iran does not intend to maintain the production at the same level or reduce it. Secondly, it was announced that Iran intends to reduce oil prices for Asian consumers, which is aimed at increasing sales. It is clear that reducing prices is one of the tools of competition. In this respect, Iran’s main rival is Saudi Arabia. This country is already going to oust Iran in many markets, and Iran's plans could force Saudi Arabia to increase oil prices rather than reduce and go to a price war. In this regard, it should be noted that Saudi Arabia itself also suffers from inexpensive oil, even though only a couple of years ago the possibility that the country will face financial problems looked incredible. Now there is not only budget deficit (this is not an indicator), but also reduction of the budget. In addition, a few months ago Saudi Arabia reduced oil price to boost sales.


In this situation, Iran's participation in the meeting does not mean that an agreement has been achieved. On the contrary, it will strengthen the differences. But it would be biased to accuse Iran of being a source of problems in the market and as a barrier to growth of prices since Iran has for years been under the influence of the embargo, while other countries in the period of high oil prices managed to sell oil much as they wanted, and many of them have accumulated substantial reserves. The successful resolution of the serious problems in the nuclear issue has become possible due to mutual concessions between Iran and the West, and one of the goals of this historic accomplishment was to lift the embargo. Now, after having achieved this goal, sacrifice it all for the interests of the ephemeral market ... Therefore, an agreement, if reached, is too unlikely to profit the market. This is not the only obstacle.


Second Obstacle


Some analysts believe current prices have not resulted from the freezing of oil production. That is, according to this view, if the meeting results in an agreement on compliance with the quota, it will not affect the prices, because market participants have already made such an assumption, which is reflected in the prices. According to experts, the price of 40-42 dollars already necessitates an agreement on freezing. Let’s take a look at the dynamics of oil prices in recent years. This dynamics confirms these assumptions to a certain extent. Official information about the meeting was announced in mid-March. As a result, 16 March Brent crude increased by $1.6 or 4.1%, on March 17 an additional rise by $1.2 or 3%, reaching the level of $41.5. In fact, the oil price rose by more than 7% over the two days following the announcement of the official information about the meeting. Because the fact and the expectation that such a meeting will take place have left a positive impact on the market, and this suggests that the possible agreement is already reflected in the price. Note that, since the March 22, the price has gone down for various reasons, but in early April growth resumed again, and now the price of Brent crude oil is $41-42. It should also be noted that a similar level was last seen in early December last year, and the price increase occurred against a background of absence of factors such as major changes in the global economy, forecasts, or a decline in oil reserves. This fact can be considered as the Doha meeting’s influence on the market, to a certain extent only. Since mid-March to the present day, the dollar against the euro fell by 2.7%, which, roughly speaking, is only 1/3 of the increase in oil prices. Thus, taking into account it all, if the agreement on reducing the production is reached, the prices will certainly rise because such an assumption is too daring. What is more realistic is the fact that participants will in the best case reach an agreement on freezing current levels. But this does not indicate the reality of the agreement as the obstacles exist.  



Third Obstacle


This is the most interesting, most dubious and at the same time most subjective obstacle. The idea is that if an agreement is reached, some countries will not comply with it. The scheme is very simple: the agreement reached, but not put into practice, oil overabundance remains in the market, the price does not go up. The question arises: if there are such possibilities, if there is no trust among participants of the upcoming meeting, if there are doubts about the implementation of agreement reached at the highest level, what is the point in holding the meeting? Is this meeting going to take place for the sake of formality, to simply say that “we did all we could, but it failed. Now everybody should work for themselves”? Not convincing at all. Perhaps there is no such obstacle at all and rather it is only an invention of some? Whose invention? It is weird that the possibility that the agreement will not work and be complied with is spoken of by Russian experts mostly. We’re not thinking of accusing, but these statements sound like the issue of leaving a chance beforehand for non-compliance with the agreement. Most Russian experts say that the agreement will not be complied by many and they therefore need to be alert.


As can be seen, all oil exporters are interested in the rise of oil prices. But there are serious and reasonable doubts about joint actions to be taken. Regrettably, participants of the oil market are now more differed in their opinions, let alone taking a joint action. This, in turn, reduces the possibility of reaching a concrete decision. Perhaps, the April 17 meeting will have no results, perhaps it will give impetus to increase in oil prices. It cannot be predicted precisely, because the obstacles are a lot…






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/ 25 April, 2017