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OPEC Supply Freeze: Who Wins In An Agreement Where No One Loses? - Macquarie

OPEC in discussions to freeze output at January levels

Earlier today, Saudi Arabia, Russia, Qatar and Venezuela announced an accord to maintain average crude oil production in 2016 at levels realized in January 2016.

The deal is contingent on a broader agreement among OPEC members, and we do not expect Iran to agree to the deal as it stands. In our view, there would need to be a concession for Iran to allow for some recovery towards production at pre-sanction levels.

We view initial discussions as a positive step, although expect the impact to global crude S/D balances to be minimal in the near-term.

Not a game-changer but OPEC walking in the right direction

Short-term impact: No meaningful impact to OPEC production levels

Even excluding Iran from this accord, freezing output at January levels would not meaningfully impact OPEC production, which has already achieved much of the anticipated growth through January that was expected for 2016. Per OPEC, January crude production averaged 32.3 million BPD, an increase of 130 thousand BPD month-over-month.

Arguably, a positive outcome is Iraq giving up the right to further growth; eliminating the tail risk of Iraqi production ramping up significantly in 2016.

Medium-term impact: The beginnings of an accord is positive

The meaningfulness of this agreement lies in the fact that it may mark one of the first co-ordinated steps by OPEC in a process to assess whether the members of the organization have sustained enough pain emanating from the low price and will re-install its previously foregone policy of market stability.

An accord of this nature would be positive in the medium-term as it would represent in essence a return of OPEC to country-level quotas, with controlled maximum production levels replacing the current "free-for-all" strategy.

For all the posturing, this is a clear indication that low prices are creating significant pain across the producing world.

Limited impact to global crude market, for now

A return to OPEC country-level quotas capped at current levels would provide some discipline to production. We view this positively in the medium-term, albeit recognising the impact to global S/D balances would be minimal in the near-term.

Oil is cheap on its own merits regardless of the outcome of these talks

We expect to see continued volatility in crude markets in the near-term. Our expectation is that Brent will remain in the $25 - $45 per barrel range through 1Q16, as crude markets struggle with high inventory levels and a continued S/D surplus.

Our analysis suggests that rebalancing is occurring and that we are on track for a rebalance to seasonal norms by 3Q16. A positive outcome on these talks could accelerate the rebalance.