Oil Production Freeze Agreement No Panacea, but Suggests Restraint Possible

A reported agreement that Venezuela, Russia and Saudi Arabia have agreed to a production freeze, but analysts are noting it may not be time to celebrate just yet. The agreement hinges on Iraq and Iran signing on and pledging they won’t increase their production either – a caveat that doesn’t bode so well for the plan.

“While it's the first coordinated supply move of any kind by OPEC members and Russia in the past 15 years, it is clear that any deal without Iranian and Iraqi participation will do little to tighten the market, at least in 2016,” analysts at Raymond James said in a Tuesday note to investors about the agreement, which also includes Qatar.

The deal to leave production at January levels would tighten the market by about 120,000 barrels per day (bpd), and most of that would come from Russia, which isn’t a member of the Organization of Exporting Petroleum (OPEC) group. However, if all OPEC nations plus Russia decided to park their production at January levels, the impact would be about 700,000 bpd, analysts said.

Investors recognize this isn’t a panacea for rebalancing supply and demand, but “wouldn’t completely dismiss the symbolic value of coordinated OPEC/non-OPEC action,” they said.

At Simmons & Company International, analysts pointed out that Iran’s leaders have repeatedly said they intend to restore production quickly with their recent relief from some Western sanctions in January.

What’s more, the agreement “crystalizes a few grim existential truths,” Simmons’ analysts said, including that $30 oil is taking a serious toll on even the lowest-cost producers, particularly Russia.

“Without agreement from Iran and Iraq, the two countries most likely to increase production going forward, the agreement to freeze output will have little impact as most market prognosticators are assuming OPEC supply ex-Iran is going to be held flat,” Simmons said. “That said, the fact that major producers are holding discussions increases the potential for future production restraint.”