It is pointless for oil rich countries to cut oil production

It is pointless for oil rich countries to cut oil production

18 February 2016, 15:55 915
The latest report released by International Energy Agency reveals that there hasn'’t been a decrease in oil output despite oil prices falling four times in the global market. On the contrary, some countries are pumping even more oil. This is why a meeting was held behind closed doors between Energy ministers of Qatar, Venezuela, Russia and Saudi Arabia in Doha on February 16. As a result, ministers agreed to “freeze oil” output at January 11 levels. It was noted that, this step was taken to prevent the declining dynamics of oil prices that had seen a sharp decrease in recent months. After this decision, Iraqi officials announced that they might freeze oil production if non-OPEC countries as well as OPEC countries adopt this decision too. In the light of these statements, there emerged another rumor that Iranian and Iraqi representatives would also join the next round of talks between main oil producing countries. It should be mentioned that, one of the main factors influencing the cheapening of oil prices was 1.5 - 2 million barrel increase in daily oil output by OPEC member countries. According to experts, getting rid of this factor would raise oil prices. 

The head of Oil Research Center, Ilham Shaban said in his interview with “Kaspi” that the issue is a lot more complicated than just reducing oil output and raising oil prices. In his opinion, one of the main reasons that make the situation more complicated is OPEC and non-OPEC countries speaking from the same position on any platform: " In current situation, it’s not easy at all. Hence we can’t unambiguously say that the statements they utter will help stabilize or raise oil prices in the middle or at the end of the current year. This is why the meeting between Saudi and Russian Energy ministers on Sunday was so widely discussed in the media. This event had an impact on stock markets on Monday as well. Oil prices rose by 6% in a day. But after the meeting, Saudi Energy ministers released a statement saying a decision was made on keeping oil output on the same level as it was on January 11. Let’s look at this figure and see what it means. The oil output was at its peak on January 11. International Energy Agency report revealed that Saudi Arabia was producing 10.2 million barrels of oil in a day in January. And Russia has been  steadily increasing oil output in the last 6 years and it was around 10.8 million barrels a day in the first month of the year. This was a record figure for former Soviet countries. Iran and Iraq have increased oil production as well. What is the point of maintaining the peak levels of output in this situation? This will not have a serious impact on oil market”". 

According to Shaban, after the statement of the ministers analysts studying the oil market have come to a conclusion that if the price of “black gold” further drops, it is vital for Russia and Saudi Arabia to lower oil output:"“Because companies are also reducing the investment and the decrease in oil output in the second half of the year is inevitable. It was projected last year that Russia alone would reduce oil production by 500 million barrels. If the decrease in oil production was predicted, statements such as “we will not increase oil output” or  “ we are “freezing” oil prices to the level it was on January 11” will not have a significant effect on the market. At the same time, the press service of Russian Energy Ministry announced that the efforts would be in vain if OPEC member and non member major oil producing countries don’t join or support Doha agreement. This is reasonable. Let’s say Saudi Arabia, Russia and Venezuela reduces oil output by 1 million, 500 thousands and 200 thousands respectively. However, Iran and Iraq increases oil production by a million barrels and 500 thousands barrels. So the increasing of oil output by one side compensate for the reduction in oil output by the other. Besides, there is enough oil in tanker, barges and on the ground. These reserves are a big tool in the hands of traders and they will put those reserves in the market, if there is a deficit. Selling this large amount of oil will not allow let the oil prices to go up”". 

Shaban stated that there had to be a certain mechanism in the matter of “freezing” oil prices at the levels it was on January 11. According to him, OPEC and non OPEC countries can only discuss this issue in March. Because this is when OPEC is holding its next conference: "“Until the conference is held and serious decisions are made and the implementation of these decisions is ensured,  statements issued by various groups will not be that important. I follow the media, they exaggerate the importance of the Doha meeting, as if the sides had signed any papers during the meeting. All that happened was that one of the ministers released a statement. There are countries where government plays no role in oil industry and private companies have the final say in this issue. These countries should regulate their relations with those companies. And it will take at least 3-4 months. Because each company operates as a commercial entity and they all have their own economic interest. Maybe one of the companies owes billions of dollars to state budget or the banks? There are many other examples like this. This is not a remote control in a human that we can press a button and stop the production of 1 million barrels of oil. In addition to OPEC, other non-member oil producing countries should come together  and make important decisions. And while we’re talking about non-OPEC countries, we should take into account giants like the USA. This country produces over 9.2 million barrels of oil. America may not reduce oil output by referring to the fact that its oil output is falling".