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Iran: Wildcard In Oil Pact

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Iran: Wildcard In Oil Pact
iran-oil

As crude futures gyrate on every little rumor, hopes are pinned on the grand conference of oil producers scheduled for April 17 in Doha, Qatar. A final list of attendees has not been released, but representatives from around 15 oil exporting nations are expected to participate. These nations account for 73% of global oil production.

But the shadow of one nation is looming over the summit: Iran.

Recently freed from international sanctions over its nuclear program, Tehran is in a frenzy to bring oil exports back to normal levels. Massive amounts of oil stored on tankers before sanctions were lifted allowed Iranian oil exports to spike to 3.22 million barrels a day -- a four year high.

As part of regaining their lost market share, Iran is undercutting Saudi crude prices in Asia. April marked the third month in a row that Tehran has reduced the price of Iranian oil sold in Asia. There's more than just an economic benefit from gaining market share at the expense of the Saudis. Iran and Saudi Arabia are fighting proxy wars In Syria, as well as along Saudia Arabia's southern border in Yemen. Anything Iran can do to reduce oil income for the Saudis will add to the financial pain of the kingdom's efforts at regime change.

Crude Talk

In addition to the "usual suspects" of Saudi Arabia, Kuwait, the UAE, and Russia, smaller oil producers are being offered seats at the table. Kazakhstan, Azerbaijan, and Oman are non-OPEC members who been invited to attend. Notably, Canda, the US, and Mexico will not be attending, as they are seen by the others as the reason oil prices have tanked in the first place.

Libya, which is basically a failed state at this point, will not be attending, as government forces and rebels fight over oil infrastructure.

Cheaters Gonna Cheat

crude

The goal of the April 17 meeting is to forge an agreement to stabilize oil prices by freezing oil production at current levels. However, a successful production freeze would still mean that global crude stockpiles would increase by 1.5 million barrels a day.

In a perfect world (at least for oil producing nations,) everyone could be trusted to not break a quota agreement, and oil prices would rise. However, past experience shows that that is not possible.

In an attempt to salvage the April 17 meeting in Doha, plans are being made to reach an agreement without Iran. Iran has indicated that it actually will attend the oil summit, but will not sign any production agreements.

Latin American Mini Oil Summit

OPEC members Ecuador and Venezuela and non-OPEC member Colombia held a Latin American mini-summit of their own on Friday, ahead of the Doha meeting. The idea is to present a coordinated position at the bargaining table in Qatar.

Peak Oil For Moscow?

russia-flag-oil

Nick Cunningham at Oilprice.com believes that Russia has nothing to lose by agreeing to a production freeze. It will have an increasingly hard time maintaining present record-high output as production tapers off due to a lack of new new wells being drilled. He notes "Even though Russian output rose to 10.91 million barrels per day in March, 2016 could mark a permanent peak in output as its aging fields enter decline."

One source in Russia claims that Moscow would like oil prices to recover to the $45-$50 range, to ease the pain being inflicted on the Russia economy. The source noted that if oil prices moved above $50 a barrel, US shale oil production would recover.

Shale The New Oil Overlord?

Ole Hansen, Chief of Commodities Strategy at Saxo Bank, thinks pretty much the same thing. He says that $55-$60 oil would see US shale production actually increase, as more wells would be drilled.The nimbleness of US shale producers (those that are left, that is) to react to market conditions puts them in the position of global oil swing producer. This will effectively put a cap on oil prices for the foreseeable future, no matter what plans OPEC and/or Russia make.

Can They Walk The Walk?

Gulf-oil-states

OPEC and Russia have been making statements to move the markets, without having to actually do anything. But all the gains from playing the "central bank trick" will come crashing down on April 18 if an agreement isn't announced.  If talks fail, oil prices will plunge, taking world stock markets down with them.

Of course, the usual suspects can immediately start the rumor mill back up, hinting of great things that will be accomplished at the June 2 OPEC meeting in Vienna.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product

About the Author

Everett Millman

Steven Cochran

Precious Metals Market Analyst
BS University of South Florida (2002)

A published writer, Steven's coverage of precious metals goes beyond the daily news to explain how ancillary factors affect the market.

Steven specializes in market analysis with an emphasis on stocks, corporate bonds, and government debt. He writes a monthly review of the precious metals markets for SurvivalBlog.com.

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