Last weekend OPEC Secretary General Mohammed Barkindo announced that there would be only consultations but no freeze decision at the upcoming Algeria meeting. On Thursday it was revealed that mid-level officials from Saudi Arabia and Iran were holding talks in Vienna in preparation for Algiers leading to speculation about an impending freeze deal. But on Friday “sources” speaking for Iran and Saudi Arabia both said no deal.
In our previous notes on the topic, we have stressed two fundamental positions that have not changed: Saudi Arabia wants Iran to freeze production & Iran says it cannot freeze so soon after nuclear sanctions were lifted. Thus it’s not hard to see why the push for a September freeze is now on ice.
Reuters also reported late Thursday that Saudi Arabia had offered to share in a combined one million barrels a day production cut with Kuwait, UAE and Qatar in exchange for an Iran freeze. We continue to think a change in production policy now is too soon for the Saudi market share strategy as it would boost US production. So if the Reuters report is accurate, we view it more as a public relations move - the Saudi’s knew Iran could not agree and now Iran looks like the uncooperative party within OPEC. Cue the Russians to say asking Iran to freeze is unfair.
As a result, we think a September production freeze is off the table. To reset expectations, Secretary General Barkindo might want to repeat his announcement from last weekend that Algiers will be about consultations not decisions.
Consequential November 30 OPEC Meeting
As we said in a note last May previewing the Spring OPEC meeting, the next regular OPEC meeting on November 30 looks to be consequential. While we are not yet predicting a policy change at the year-end meeting, we do believe it may be under consideration for the first time in two years. The Reuters report on a Saudi proposed cut in exchange for Iran freezing production may also be a sign.
Much will depend on reductions in US, other non-OPEC and perhaps even OPEC production in the fall. In particular, we believe the key barometer for Saudi Arabia is further declines in US production.
Iran Participation is Critical
The key question going forward is when will Iran be in a position to agree to a freeze or any limits on production.
Iranian production has risen by about one million barrels a day (b/d) since nuclear sanctions were lifted but some analysts now suggest production has hit a plateau and speculate that Iran may soon 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 the rocks.
