Oil Prices: The Doha Accord and Its Aftermath

تم نشره في Wed 9 March / Mar 2016. 08:26 PM - آخر تعديل في Sat 12 March / Mar 2016. 06:45 PM
  • Oil Barrels Prepared - (Reuters)


Laheb Ata Abdul Wahab

Since June 2014 oil prices are in their nadir, from a price per barrel of Brent traded for USD115, prices have plummeted more than 70 per cent. And since the ushering of 2016, prices somewhat hovered around USD30 per barrel.

The drop in oil prices is due to the culmination of 3 direct factors: One, on the Supply side of the market dynamic, the so called “Shale Oil Revolution” —particularly in the United States, has seen oil production increase by around 5 million barrels a day reaching a high of 9.4 million barrels per day early into the year. Shale oil, although not new, came to fruition by 2005 due to technological breakthroughs, namely hydraulic fracturing, better known as Fracking, and 3-D Horizontal Drilling. This development means that the US is becoming less and less dependent on its imports of oil, including those of the MENA region; a development that entails grave geopolitical ramifications, with the Obama Administration adopting the so called Pivot Asia Policy.

Second, the role of OPEC, which —contrary to market parameters, maintained its daily production at more than 32.5 million barrels, far above its targeted quota of 30 million. Led by the king makers of oil —Saudi Arabia, with the support of their brethren of the GCC, a new oil policy came into effect. The swing producers of the past, have been abandoned in favour of flooding the market with oil to undermine the production of Shale, which in order to remain feasible would have to maintain a price no less than USD70 per barrel. Conspiracy theory advocates add a political dimension to the story. According to the narrative, the Saudis in keeping production unchecked, took aim at Iran’s economy in one hand, and Russia’s in the other, whom both require a price of USD100 per barrel to breakeven.

On the Demand side of the equation, third, Sluggish growth rates, particularly in the emerging economies of Asia, e.g. China and India —notwithstanding the Euro Zone slowdown, contributed directly to the sharp dip in demand. Added, the build-up in the inventories of The Organisation for Economic Co-operation and Development (OECD), with stocks in the US alone exceeding 503 million —its highest since 1930, combined accumulated an unprecedented stash of oil.

As a consequence, the market continuously oversupplied —the so called Oil Glut, by more than 2 million barrels per day.

The Doha Get together

To revitalise to the saturated oil market, the four major oil producers met, namely three OPEC members Saudi Arabia, Venezuela, and host country —Qatar, with non-OPEC Russia in the Qatari capital, Doha, on the 16th of February.

To attain market equilibrium, the four producers decided to freeze production (not to be confused with suspending production) at January 2016 levels. The agreement was conditioned by other oil producers following suit. To date, both the Saudis with a production rate of 10.2 million barrels a day —its highest since 2009, and the Russians with 10.8 million a day —its highest since the Soviet era, have put pen to paper and sealed the agreement.

Accordingly, 10 to 15 oil producing countries around the world have stated willingness to comply with the terms of the agreement. Consequentially, a follow-up meet to the “Doha Accord” is scheduled on the 20th of March in Moscow to discuss further detail.

Iran, Iraq, and the “Doha Accord”

Any success of the freezing agreement hinges on Iran’s joining the band wagon. The Iranians have so far ridiculed the “Doha Accord” and dismissing any calls to freeze production as shambolic. Iran argues that the Country has suffered gravely under economic sanctions imposed since 2012 on the backbone of its controversial nuclear program —waived recently by the so called P5+1. Currently producing 2.8 million barrels per day, Iran plans to expand its output to pre sanctions level which stood at 4.4 million barrels a day.

Iraq, on the other hand, has seen its production surge to 4.7 million barrels day, superseding Iran as the second largest oil producer in OPEC, after Saudi Arabia. To fulfill their economic developments targets, Iraq plans to be producing 6 million barrels per day by the end of 2017. Therefore, any talk about freezing production levels seems quite farfetched,

The Aftermath

To conclude, the market remains awash with oil. After a prolonged slide that took oil prices within sight of USD20 a barrel last month, oil prices have finally bottomed out. Whether it will improve sustainably, remains the million dollar question.

The recent rebound with Brent hovering around USD40 a barrel comes as investors focus on the decline in oil drilling, with the number of oil and gas drilling rigs globally, according to Baker Hughes —the Oil field service company, dropping to 1,761 rigs worldwide; its lowest since 2002.

A sign that oil producers are cutting back on output due to low prices make high cost rigs uneconomical. The hope is now pinned on a freeze in output by major oil producers, for prices to keep rising. We, in the meantime, will keep our fingers crossed!