OPEC Oil Production Agreement Doesn't Change Anything
Feb 16, 2016 11:02 AM EST
If Russia is, as Winston Churchill said, "a riddle wrapped in a mystery inside an enigma," then what to make of the motivations of its proposed oil freeze with cryptic frenemy, Saudi Arabia? The image that springs to mind is taking the enigma, locking it in a safe, shoving that in the trunk of a car and driving the thing off a cliff into the sea.
From Russia With Caveats
Which may actually be the best thing that can be said of it, at least from the perspective of oil bulls.
That is because the agreement, at least as revealed thus far on Tuesday, changes nothing in practical terms -- yet.
Russia, Saudi Arabia, Venezuela and Qatar say they will freeze oil production at January levels, provided others -- read: Iran -- agree to do the same. Written another way, you could say that four large oil producing countries just confirmed that they won't cut output, which was the same situation that prevailed last week, before oil prices rallied on news of talks between OPEC members and Russia.
The freeze faces three big problems.
The first concerns Iran, which is seeking to regain market share after the lifting of oil sanctions. As I laid out previously here, current supply and demand projections from the International Energy Agency imply that, at OPEC's current level of production, commercial oil inventories in the OECD countries would rise from an already-bloated 3 billion barrels at the end of 2015 to north of 3.3 billion by the end of June. Assume that Iran's production climbs steadily from 2.9 million barrels a day in January to 3.6 million by the end of 2016, and inventories rise above 3.4 billion barrels by the time Christmas rolls around.
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http://www.bloomberg.com/gadfly/articles/2016-02-16/opec-oil-production-deal-doesn-t-change-anything
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