Editor's Note: Below is a prescient research note published yesterday on the oil industry and ongoing OPEC developments from Potomac Research Group Senior Energy analyst Joe McMonigle. As you can see in this Bloomberg story from last night, McMonigle continues to stay ahead of the consensus herd. To access McMonigle's institutional research ping sales@hedgeye.com.
Oil prices have experienced a moderate rally over the past two months since the production freeze proposal was unveiled in Doha on February 16 by Qatar, Russia, Saudi Arabia and Venezuela. So they will try to do it again on Sunday with about a dozen other producers attending the meeting.
One hitch: Saudi Arabia agreed to a production freeze only if all other producers agreed to participate, including and most especially Iran.
On Friday, Iran's oil ministry released a statement saying the Iranian oil minister will not attend the Doha meeting but will instead send a delegation "to explain situation of Iran" that "it cannot join the plan to stabilize oil prices."
That is why Saudi Arabia's oil minister, when asked this week by a reporter about the freeze, he replied, "forget about it." Saudi Arabia's Crown Prince also very publicly declared in an extensive Bloomberg News interview that the Kingdom would not freeze production unless Iran did as well. We believe there is no chance Saudi Arabia reverses its position and agrees to freeze production on Sunday.
The freeze would only be meaningful with Iran's participation, which is the only producer capable of ramping up production. But Iran has made it clear that it won't participate and even freeze proponents now concede that any agreement will exclude Iran. Therefore, despite the freeze marketing, there is no control over production.
OPEC and Russia are currently producing near-record amounts of crude. OPEC members Qatar, UAE, Iraq, Nigeria and Ecuador are at maximum production; Saudi Arabia, Kuwait and Angola are at near maximum production. Therefore, a freeze will only continue the supply glut and add to record crude inventories.
What we do expect to see in Doha is great public relations: positive talk about cooperation to stabilize oil prices. With a June 2 OPEC meeting just 45 days away, we suspect many speculators will be swayed by the Doha public relations. But we are highly skeptical that any meaningful agreement will be reached or that it changes the outlook for oil markets.
So what is the goal of the freeze talks? You may recall that in a March 29 note to clients, we said the goal of the production freeze proposal is to establish an artificial price floor. Our assessment was confirmed on Thursday by an invitation letter to oil ministers sent by Qatar's oil minister. The letter dated March 23 said the freeze proposal "has changed the sentiment of the oil market" and "has put a floor under the oil price." The letter was obtained by Bloomberg news under a Freedom of Information request to Norway's petroleum ministry.
June OPEC Meeting - Don't Expect a Production Cut
In a little more than a month after the freeze meeting on April 17, OPEC will meet for its regularly scheduled meeting on June 2 in Vienna. Many observers point to cooperation on the freeze as setting the predicate for action at the OPEC meeting. We see it differently.
We are not expecting any change in production from OPEC at the next regularly scheduled meeting in June . We maintain our investment thesis that Saudi Arabia believes its market share policy is winning. Therefore, it's still too soon for a production cut that only serves to throw a lifeline to U.S. shale and other non-OPEC producers to increase production. The next meeting of any consequence will be the year-end OPEC meeting in December when there may be the first serious consideration of a production change. However, it is still too early to forecast any policy changes. We would expect the picture to be clearer in late summer after non-OPEC production declines are evident.
