Doha Conference Preview: Downside Risks To Oil Price - Nordea

Optimism is growing ahead of the important meeting in Doha on Sunday 17 April between the majority of the OPEC members and some non-OPEC producers. The producers are going to discuss a proposal by Russia, Saudi Arabia, Qatar and Venezuela to freeze output at the January level. The prospect of a freeze plan has helped oil prices rise by around 60% from a 12-year low close to USD 27/barrel in January, despite doubts that it can substantially impact the supply glut in the oil market.

Who’s attending the meeting?

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All OPEC members, except Libya whose oil output is closed in by political conflicts, and Iran has not yet confirmed its presence. In addition, the non-OPEC producers Azerbaijan, Colombia, Kazakhstan, Mexico and Oman will attend. By contrast, some of the world’s biggest oil producers will not attend. The list includes the US, Canada, China, Brazil and Norway. Many of these countries have laws prohibiting price cooperation agreements and thus cannot take part in a coordinated production freeze/cut.

Expected outcome

According to a survey by Bloomberg among 40 analysts and traders, the opinion was split evenly on whether a deal would be struck or not. We expect a loosely-framed deal to be agreed on Sunday without a production cap by Iran.

How could a freeze agreement impact the oil market?

Since most of the oil producers were producing at almost full capacity in January, a freeze will have limited effect on their medium-term output potential. The only two countries that could increase their production significantly were Saudi Arabia and Iran. Saudi Arabia was producing at a long-term high level in January and has no real incentive to increase production much except from a short-term market share advantage as low oil prices weigh heavily on the country’s budget balances.

A deal where oil producers would freeze their output at January levels would, by contrast, have a big impact for Iran. The strict sanctions against the country’s oil industry have cut oil exports markedly since 2011. Thus, the historic agreement with the UN, the US and the EU this summer that led to a removal of the sanctions this January should boost the country’s oil production and thereby the economy. Iran has indicated that it can increase production by around 1m b/d in 2016; this will in turn give a boost to the faltering economy and the political strength in the region. Therefore Iran has no incentive to freeze production at the January level as it would mean that the last one and a half years with tough negotiations would have almost no impact on the country’s oil industry and finances.

The most important effect would probably be that the fall in US production will not be compensated by an increase in OPEC production on top of the expected return of Iranian barrels. The major changes to the oil market this year are expected to stem from Iran and the US. Thus, how quickly US production will decline and how quickly Iran will return will be of major importance to the physical balance in the oil market. A cut in oil production is needed to rebalance the market, but a cut is not on the agenda at this meeting as we see it.

Price effect skewed to the downside

If a deal is set to freeze production, we expect to see a small upswing in oil prices in the short term. Since the impact on the physical market from a freeze without Iran will be limited and the oil market is still flooded with oil, we don’t expect a sharp and long-lasting price rise. On the other hand, if oil producers do not manage to close a deal, oil prices could fall by as much as USD 5/barrel or even more short term as this will dash any hopes of reaching a cut or for OPEC to agree on new production quotas for some time. But we don’t expect prices to fall below USD 27/barrel as US shale production has shown signs of declining more sharply this year, and we expect this trend to accelerate in H2