Oil producers risk severe impact on prices if freeze deal fails

By Grant Smith on 4/12/2016

LONDON (Bloomberg) -- The early success of an oil supply accord between OPEC and Russia in reviving crude prices is magnifying the potential costs of failure if producers meeting this weekend fail to complete their deal.

Brent crude futures, which sank to a 12-year low in January, have climbed 30% since Saudi Arabia, Russia, Qatar and Venezuela reached a preliminary agreement to freeze output on Feb. 16. While Russia’s energy minister says he’s “optimistic” the accord will be finalized in Doha on April 17, Goldman Sachs Group Inc. warned that the weight of expectation poses a “bearish catalyst’ if the talks fail.

“They’ve built this thing up for so long, if they just end up shouting at each other and walking out of the room, the negative impact for pricing is pretty severe,” said Seth Kleinman, head of European energy research at Citigroup Inc. in London. “And they’re probably well aware of that.”

Tensions have been visible throughout the negotiations. Saudi Arabia has insisted it would only commit to an output cap if Iran follows suit, a proposal that Iran’s oil minister has dismissed as “ridiculous.” Iraq has ramped up supply to record levels, and Kuwait announced similar plans. As rising prices help OPEC’s rivals stay in business, the rationale for the accord is fraying, Goldman Sachs says.

“Why would they reverse course after 18 months of the current environment—we’re starting to finally see the fruits of that” in terms of reduced output, Jeff Currie, head of commodities research at Goldman Sachs, said in a Bloomberg Television interview. There’s a “high risk that the meeting fails to deliver any concrete agreement,” he said in a report.

The likely outcome on April 17 will be “a soft agreement which would not really do anything to fundamentals,” Currie said. Anything stronger is “not in anybody’s interest right now,” Currie said.

About 16 countries—including most members of the Organization of Petroleum Exporting Countries, as well as non-members, such as Oman and Azerbaijan—have agreed to meet in the Qatari capital on the weekend. While OPEC states that had pushed for production cuts instead of a freeze, such as Venezuela and Algeria, have softened those calls, it’s only served to highlight discord on the group’s Saudi-led policy to let market forces bring supply and demand into balance.

Saudi Arabia is only prepared to abide by a freeze “if all countries agree,” Deputy Crown Prince Mohammed bin Salman said in an interview with Bloomberg published on April 1. On the other hand, if other countries raise their output, the kingdom will boost its own sales, he said. Iran, which had sanctions on its crude exports lifted in January, has repeatedly made clear its intention to revive production.

Brent futures traded near $43/bbl in London on Tuesday. Prices could tumble to $33 or even $30 if the meeting on April 17 ends without an agreement, Saxo Bank A/S predicts.

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