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The Next OPEC And Non-OPEC Producers Meeting In Doha Could Agree A Freeze?

Summary

  • The Iran's role in OPEC has become important.
  • Will the enmity between Iran and Saudi Arabia affect the price of oil?
  • Will they compromise and freeze production?

OPEC and non OPEC producers meet at DOHA April 17. This meeting has the potential to produce an agreement affecting the value of a huge basket of commodities and currencies: gold, the US dollar, the Mexican peso and other energy-sensitive currencies, but most importantly, the price of crude oil.

ยท The suggested meeting objective is to freeze oil production at January, 2016 levels.

In countries for which oil production is a significant share in the budget, low oil prices can be disastrous. The effects go far beyond the gas pump.

Countries such as Venezuela, Russia, and Azerbaijan - high production cost exporters - are desperate.

For them an agreement to stabilize the price between $40 and $50 per barrel, minimum, is urgent. But there is a big problem: Iran.

Iran, the headache of the meeting

In 2012 Iran was sanctioned for it's nuclear program by the Union Nations, European Union, United States of America and other countries. One of the most reliable sanctions implemented by the EU was the ban on the import, purchase and transport of Iranian crude oil and natural gas.

The USA, in particular, prohibited almost all trade with Iran. As a result of these sanctions, Iran's oil exports fell to 700,000 bpd (barrels per day) by May 2013. This is a decline of more than 65% from the 2012 level of 2.2 million barrels per day (NYSE:BBD). Iran's oil minister, in June 2013, claimed a loss of about $26 billion dollars in 2012 alone.

The lifting of economic sanctions took place on January 2016, when the price of the oil was at its lowest in 13 years, not a good moment for more barrels in the market.

It wasn't a good moment for the oil market to absorb greater production. Compounding the effect of the immediate addition of Iranian supply to the market, Iran publicized its aim is to reach 4 million bpd that had been its supply before the sanctions, double its current production.

Where the problem begins

The two producers, Saudi Arabia and Iran, have long been the religious centers of their respective Muslim sects - Sunni and Shia. These sects have been mutual antagonists for over a millennium. As one would expect given their huge economic incentive to collude in limiting the supply of oil, however, the relationship between the two countries has fluctuated between belligerence and cooperation for much of this time, especially during the last 80 years.

For example in 1976, the Shah of Iran declared that oil was undervalued and that OPEC needed to hike the price. This would have helped Iran to reduce their government's fiscal deficit and to simultaneously increase their military spending.

Instead Saudi Arabia, whose dominant proven reserve position and substantial excess production capacity make it the de facto leader of OPEC, refused to increase the price of its oil and stated their intent to increase production.

Today, ironically, history is being repeated, but with roles reversed. Most of the oil countries producers want higher prices and a less volatility in the price, so they want to freeze the production. Iran, who just got out the embargo and sanctions, doesn`t want to freeze their production, so they want to recover the market they had before. And the triangle is completed with Saudi Arabia, but here is when the problem begins.

"If all countries including Iran, Russia, OPEC countries and all other main producers decide to freeze production, we will be among them," states Deputy Crown Prince Mohammed bin Salman.

Bloomberg interviewed Mohammed bin Salman on March 30. In the interview Salman left in doubt the possibility of a freeze. He mentioned that if "someone" decides to raise production, Saudi Arabia would be ready. That sounds ominous, considering Iran's desire to expand its production.

Iran will not bow to demands from Saudi Arabia to keep their production at January levels, because they have no incentive to do that. Why would Iran worry about the wishes of countries that placed them on sanctions four years ago? Their reasonable current primary interest is to recovering their old clients, and their previous production capacity.

The effect on the fiscal condition of other countries cannot be Iran's primary concern, even if some countries are suffering a sharp cut in their budgets.

As the economics of OPEC proven reserves, production capacity, and population size dictates, only Saudi Arabia has the capacity to resist low prices by adjusting its economy. For example, Saudi Arabia might increase or create new taxes.

The Saudis have realized that they don't have the capacity to put aside the whole fracking industry of United States, by production expansion. They have inflicted considerable pain in the US oil patch, but even US production is far greater than they had hoped. If we add the increased production of Iran to the mix, oil is a sell for the next several months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.