Gentleman’s agreement: what will the encounter of Russia and OPEC in Doha

Next Sunday, April 17, in Doha will host a meeting of major oil producers, on which the participants plan to take the decision to freeze oil production at the level of January 2016. According to the idea of producing countries, the agreement must stabilize oil prices by reducing the excess fuel on the market. But many experts are skeptical about the effect of the agreement, and the probability of its conclusion until recently was called into question.

Hope for a freeze

From mid June 2014 until the end of January 2016 price of Brent crude oil has fallen four times — from $USD 114.9 to $28 per barrel. There were many reasons — from a sharp increase in production of shale oil in the US to the slowdown in China. But almost one and a half years the largest manufacturers have not taken virtually any steps to stop the collapse. Their main task was to maintain market share, so they continued to increase production in 2015, world production rose by 2.2 million barrels. in a day and demand is only 1.4 million barrels.

Only after the fall of prices below $30 per barrel, manufacturers have begun to sound the alarm: in the beginning of the year Venezuela, one of the poorest members of OPEC, suggested that the largest manufacturers to agree on reducing oil production by at least 5%. But this initiative found no support, and then the Minister of oil of Venezuela, Eulogio del Pino demanded to convene an extraordinary meeting of OPEC.

On February 16 it became known that three members of the cartel — Saudi Arabia, Qatar and Venezuela — and Russia agreed to freeze oil production at the January level, but only if the arrangement will be joined by other major manufacturers. On the news of a possible agreement the price of Brent soared by 6.5%, reaching $35,54 per barrel. By the end of the day all that growth was lost: traders have realized that two of the world’s largest producer, Russia, and Saudi Arabia, in January oil was produced at maximum volume (10.9 million barrels. and 10.2 million barrels. respectively) and from the conclusion of the special agreement of reducing fuel on the market can be expected. Nevertheless, the majority of OPEC countries declared readiness to join the freezing of production, and by early March the price of Brent topped $40, in mid-April, oil was trading at the level of us $44.5 per barrel (an increase of almost 60% compared with the January low).

Intractable Iran

Bijan Zanganeh, the oil Minister of Iran, one of the largest producers within OPEC (this country accounts for about 10% of the oil cartel), from the very beginning supported the idea of freezing production, but was in no hurry to join the initiative. He said that Iran is ready to do it only after its production will reach desanctions level of 4 million barrels. a day. International sanctions against Iran were lifted only with the beginning of the year. In March, according to OPEC, this country has produced of 3.29 million barrels. a day.

In mid-March the Russian Minister of energy Alexander Novak flew to Tehran for negotiations. Their goal, as told a source in the Ministry of energy, was to try to persuade Iran to accede to the agreement (Novak this is not confirmed). Be that as it may, neither during the negotiations nor after Iran has never hinted that he was ready to become a party to the deal between Russia and other members of OPEC.

Novak after his visit to Tehran stated that the agreement to freeze production can be achieved, even if Iran will not join. But it was quick to refute the crown Prince and defense Minister of Saudi Arabia Mohammed bin Salman: in mid-April, he claimed that without Iran, the Saudis are not ready to sign the agreement and believe that the participation of Iranian partners “without a doubt” it is necessary (quoted by Bloomberg).

Later “Interfax” citing an unnamed source reported that Russia and Saudi Arabia managed to negotiate the signing of an agreement without the participation of Iran, but the Saudis officially did not confirm this. He decided for himself as the leader of OPEC actually, it turns out, it seems, only at the summit on Sunday. But the Iran deal will not join, sure most of the participants of the oil market, said Wednesday in an interview with BP chief economist Spencer Dale. The only country on Friday officially confirmed its participation in the meeting, but instead of Minister of oil from Iran to Doha will arrive the representative of the Republic in OPEC Kazempour Ardebili.

From St. Petersburg to Doha

The meeting, which producers planned to build on the agreement to freeze the production was postponed several times. At first it was to be held in late February, then at the end of March and was eventually rescheduled for April 17. They discussed the possibility to conduct it in St. Petersburg or Moscow, but this was opposed by some members of OPEC, who insisted on holding her in the country — the cartel: Qatar currently holds the presidency of OPEC.

As of April 12, in writing, its presence was confirmed from 14 countries, including 11 members of OPEC, Russia, Bahrain and Oman, said a source close to one of the parties to the negotiations (see incision). The head of OPEC Abdullah al-Badri in March said that in the meeting may participate in 15-16 countries, and the Russian Minister of energy Alexander Novak said that they account for 73% of oil production in the world.

Who will come to Doha

Invitations to the meeting were sent to 26 participants, including al-Badri and all the 13 oil Ministers of the OPEC countries, said a source close to one of the parties. In writing confirmed their participation 11 Ministers of OPEC (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE, Venezuela and Indonesia), Russia, Bahrain and Oman. Orally, according to one of interviewees , participation was confirmed by representatives of Norway, Mexico, Colombia, Azerbaijan and Kazakhstan.

Libya, the only country in OPEC, refused to participate in this meeting, as it intends to significantly increase production: up to the fall of the regime of Muammar Gaddafi and the beginning of hostilities, the country produced 1.6 million barrels. a day — four times more than now.

The reaction of the oil market

The agreement on freezing, apparently, will not be of a binding nature, therefore, it is unclear how this document can really affect the amount of oil supply in the global market, warns a senior analyst of Sberbank CIB Valery Nesterov. A source close to one of the parties to the negotiations have confirmed that there are no sanctions for violations of the agreement, it “gentlemanly”. Compliance arrangements will be watching the consultation, the working group created from representatives of producing countries.

Many experts and market participants are skeptical about the impact of the Doha meeting on oil prices, even if an agreement is reached. This agreement is unlikely to affect the market, said head of oil industry and markets the International energy Agency (IEA) Neil Atkinson. He explained that among the countries intending to participate in the meeting in Qatar, only Saudi Arabia is able to significantly increase the level of production, reports Reuters. “Freezing the production, perhaps quite meaningless. Mostly it is a gesture that aims to create the confidence that the oil prices stabilize,” said Atkinson. According to his forecast, the balance of supply and demand of oil, when the level of consumption corresponds to the level of production, will be reached no earlier than 2017. However, Novak said on Tuesday that in case of signing the agreement, the imbalance will be reduced by approximately three months earlier.

Oil prices have played a major rise on the background of news about future arrangements producers of oil, said Nesterov of Sberbank CIB. “The rise in oil prices following the meeting above $45 per barrel is possible only if the agreement to join Iran and from participation in the agreement will not give up the Saudis,” says the expert. According to him, prices may grow even stronger in the case of weakening of positions of dollar in the world market, declining oil reserves and the number of drilling rigs in the United States. “If Saudi Arabia refuses to sign the agreement, we may see a dip in oil prices up to $35 per barrel”, — he warns.

The ruble in anticipation of Doha

Sberbank CIB analysts predict the strengthening of the ruble, when exporting countries manage to agree about freezing of oil production. In this case, Brent crude oil could rise in price to $45, which corresponds to a price of 65 rubles per dollar. Iran’s participation in negotiations and the consent of this country to restrict oil production may lead to higher prices up to $50, in this case the dollar rate falls below 65 rubles. “If the Doha negotiations fail, the price of Brent could fall to $35 per barrel or lower, and the dollar will be worth 70-75 rubles“, — stated in the review of Sberbank CIB.

If after the meeting, Saudi Arabia decided to increase its production volumes, the price of Brent will fall to $30-35, warns analyst commodity market Bank of America Merrill Lynch’s Francisco Blanch (quoted by Financial Times). With the implementation of the “baseline scenario” of the Bank — maintaining the status quo following the talks, the quotations falling below $40 per barrel. In the case of the agreements about the freezing of oil production by all parties to the negotiations, including Iran, the oil price in the medium term could reach $50 per barrel, said in a research note the Bank. With this assessment agrees Saxo Bank analysts. But a Bank economist Christopher dembik Christopher notes that OPEC may not allow prices to return to the level $50-60 per barrel, because at these prices, shale oil in the US will again become profitable”.

Most of the 40 analysts surveyed by Bloomberg believe that any outcome of the Doha negotiations will have almost no effect on the actual volume of deliveries. “Now the market gives more attention to the process [of harmonization of production] than the meaning of the words that have been uttered for the last time,” says Dale. He pointed to the fact that the two main signatories Russia and Saudi Arabia — had not planned to significantly increase production this year.

The first Deputy Minister of energy Alexey Teksler in early April stated that in 2015, production in Russia will amount to 536-540 million tonnes, which is only 0.3–1% higher than last year (in January 2016 production rose more — 1.9%). The President “Bashneft” Alexander Korsik said that the company can freeze prey. “But it’s possible that someone has offered us its falling gas production,” he added. In March, Bashneft maintained its leadership in production growth in Russia, increased production by 10.8% to 1.8 million tonnes. the Two largest companies, Rosneft and LUKOIL, on the contrary, reduced production — by 1.6% (to 15.9 million tonnes) and 3.6% (to 7.1 million tonnes), respectively.