Last Friday we published a lengthy note on the five reasons why OPEC would not agree to a production freeze at the upcoming informal OPEC meeting in Algeria next week. On Sunday night, OPEC Secretary General Mohammed Barkindo confirmed our view when he announced that there would be only consultations but no freeze decision at the Algeria meeting.
We think it became clear to all the players that Iran is not going to participate in the freeze and Saudi Arabia will not freeze without Iran. Both Iran and Saudi Arabia want to appear cooperative with other OPEC members in stabilizing prices so now neither has to play the bad cop in Algeria. By signaling now that there will be no freeze decision, it avoids the Doha debacle of the last freeze attempt in April.
Freeze advocates will continue their efforts in the hope of consensus. We suspect that some OPEC members who are big freeze proponents were miffed by Barkindo’s blunt acknowledgement that there would be no decision next week in Algeria. As a result, Barkindo is now offering a fig leaf saying that OPEC ministers are working “very hard” to forge a deal and floated the potential of holding a special “extraordinary meeting” if an agreement can be reached. We highly doubt there will be such a special meeting since the next regular OPEC meeting is scheduled in late November. But the “extraordinary meeting” is the new freeze to try to keep prices in check.
Another trial balloon being floated by Venezuela and Russia is a one-year freeze to stabilize prices. This would be an incredibly short-sighted move that would result in moderately higher prices. It might help some struggling OPEC producers in need of revenue but it would also throw a life-line to US shale producers and undo the last two years of pain to acquire market share. For this reason, we think a one-year freeze will be a non-starter for Saudi Arabia.
The key question going forward is when will Iran be in a position to agree to a freeze or any limits on production. We continue to believe that a production freeze is a non-starter for Saudi Arabia unless Iran also participates. There will be no Iran exemption from participating in a freeze. Therefore, when Iran might think its production has risen sufficiently in order to agree to limits is a critical factor for purposes of any change in OPEC production policy.
For now, Iran simply cannot agree to any limits on production after just nine months into ramping up production and exports since nuclear sanctions were lifted. Iranian production has risen by about one million barrels a day (b/d) this year but some analysts now suggest production has hit a plateau and speculate that Iran might be in a position to freeze. We think arguments that Iranian production is plateauing will fall on deaf ears in Tehran for purposes of the freeze.
So what level of Iranian production is necessary for Iran to consider participating in a freeze or agree to limits? Even Iran has not answered this question.
First, Iran’s official position is that OPEC should return to country-specific quotas instead of a group ceiling. A country quota production policy would require a unanimous decision by OPEC, and Saudi Arabia opposes it.
For its part, Iran has said it cannot participate in a freeze until “it returns to the market share before the sanctions.”
Last year we forecasted that Iran could increase production by about one million b/d on their own but in order to get back to pre-sanctions levels they would need western capital and technology. Iran recently put its current production at about 3.85 million b/d and said it intends to get back to pre-sanctions production levels. Before sanctions Iran was producing about 4.2 million b/d but Iran may now view its pre-sanctions level relative to other OPEC producers like Saudi Arabia. So the “pre-sanctions level” may be much higher than 4.2 million.
Iran has finally completed its Iranian Production Contract (IPC) and expects to begin finalizing agreements with western energy companies on upstream projects later this year. When these projects come online, Iranian production could potentially increase another one million b/d in several years.
If in fact we do begin to see a plateauing trend in Iranian production and Iran has completed a few tenders for major projects, we may start to see signals that Iran is ready to play ball on a freeze or another change in OPEC production policy. Until then, the freeze is on ice.
