Is there finally good news for oil prices, which have fallen a staggering 70 per cent since June 2014? A refusal among the globe’s oil producing nations to slow output has flooded the supply of oil on the global market, and is a main reason for the commodity’s drop in value. However, a recent deal may signal they are changing their stance.
On February 16, Russia and the Organization of the Petroleum Exporting Countries (OPEC) – Saudi Arabia, Venezuela and Qatar – came to an agreement to hold oil production levels at their January outputs: 43.1 million barrels a day. However, the deal comes with the caveat that the remainder of the major oil producing nations do the same.
The announcement gave oil prices a slight boost, but that excitement was short lived. Here’s why.
Also read: If Oil is Low, Why are Gas Prices High?>
The Iranian Impact
Made at a meeting in Doha, Qatar’s capital city, the deal is dependent on participation from Iran and Iraq. Iran has since announced it welcomes the new restrictions, but hasn’t yet confirmed it they will cap outputs alongside Russia and Saudi Arabia. The nation’s oil output has recently been boosted by lifted sanctions, and it now has the ability to sell its oil anywhere in the world. In fact, the first shipment of Iranian crude in nearly three years arrived in Europe on Monday. Tehran says it’s prepared to boost its oil exports by 500,000 barrels a day and has previously stated it has no intention of freezing oil output levels. Iranian senior oil minister Mahdi Asali said his country will in fact keep increasing its crude exports until it reaches levels attained before international sanctions were imposed.
Iran’s oil minister also says the onus to make things right is on the other oil producing nations. “These countries increased their production by four million barrels when Iran was under sanctions,” Asali was quoted as saying by the Shargh Daily. “Now it’s primarily their responsibility to help restore balance on the market. There is no reason for Iran to do so.”
Calls for a Cut Instead
What is needed is a cut in production, not a freeze at the record high levels produced in January. Capping output there means little considering the oversupply in today’s market. The Saudi minister, Ali al-Naimi, stated freezing production at January levels is an adequate measure and hopes producers will adopt the plan – but his nation has much to gain from the deal, as the freeze will keep supply levels high enough to depress prices.
Too Little Too Late?
Investment bank Goldman Sachs is also brushing aside the significance of the deal.” In a note issued this week the bank says, “the proposal to freeze production at January levels would keep OPEC and Russian output at 43.1 million barrels a day.” It adds, “Implementation of such a deal would be further complicated by the uncertainty around production levels.” Iran has noted that if the four oil producing nations in this deal were to cut production by a two million barrels day it would level the playing field for other oil producers.
No Canadian Benefit
The oversupply of oil production by the nations involved in this deal has driven prices to a 13-year low, with huge consequences for nations like Canada. In response, there has been widespread job losses in oil producing provinces Alberta and Saskatchewan. Oil is currently hovering around $30 US a barrel – too cheap for Canada to sell for profit. In Canada, oil costs around $41 U.S. a barrel to produce; in the United Kingdom, it costs $52.50 U.S., and in Brazil it costs nearly $49 U.S. per barrel. In the United States, production costs are $36 a barrel.
But Saudi Arabia can pump a barrel of oil for $9.90 US, and Russia at $17.20 US. It’s most expensive in Venezuela, but still profitable at today’s price at around $23.50 US. Qatar levels are also very low, with UAE reporting a barrel of oil costs around $12.30. At this record low level only the countries in agreement are making money meaning this deal does not go nearly far enough to stop the free fall in global oil prices.