The recent conference in Doha, the Qatari capital, convened by some eighteen major crude oil producers ostensibly to re-balance global supply ended without a consensus and was adjourned sine die. Conferees included both members and non-members of the Organization of the Petroleum Exporting Countries, OPEC, including Russia. Crude oil prices fell significantly in the immediate aftermath ― U.S. futures falling as much as 6.8% in Asian trading ― but recovered somewhat, on news that a sector strike in Kuwait substantially curtailed the country’s oil production. Fund managers that bet on a supply freeze may see their portfolios severely affected and may be poised for a selloff. According to Commodity Futures Trading Commission, net-long positions on both West Texas Intermediate and Brent crude oil grades increased significantly in the lead up to the Doha conference.
An earlier accord saw Saudi Arabia and Russia, two of the world’s highest-volume producers, as well as Qatar and Venezuela freeze output at January’s near-record levels. The deal, which left some investors sanguine about a consensus in the lead up to Doha, helped lift oil prices from about US$26 per barrel ― near twelve-year lows ― to just over US$40 per barrel. But the outcome of that conference was presaged. Any idea that the conference would be fruitful was always fatuous. Long-standing religious, ideological and geopolitical differences between two of OPEC’s highest volume producers, Saudi Arabia and Iran, scuppered the deal.
Three critical points are informative:
There was an inherent futility in that Doha conference. The major oil producers were already producing at near-peak capacities, so freezing output at such levels would have done little to curb the massive supply overhang. Even if a supply freeze accord were reached, no protocol was envisioned ― neither is any in existence ― for monitoring producers’ compliance. Moreover, if breaches were determined, one wonders what sanctions would be prescribed and what capability there would be to enforce such. OPEC members routinely exceeded their production quotas when they were apportioned, and largely to no effective penalty.
Previous production accords in 2001 and 2008 were quick to fizzle out. In 2001 for example, Russia was widely blamed for breaching the accord brokered by Saudi Arabia, between OPEC and the non-OPEC producers Mexico, Norway and Russia. Given the exigencies of the day, it is doubtful if any output freeze accord in Doha would have been maintained. Continue reading