Impact of Production Freezes on Oil Markets Questionable

According to a report, year-to-date Brent oil prices are are down by 37 percent year-on-year, reflecting a continued glut in the oil market.

The report, released by Jadwa Investment, states: “In March 2016 Brent oil rose by 19 percent month-on-month,  following talks of a potential production ‘freeze’ amongst major oil producers. Despite this, year-to-date Brent oil prices are still down by 37 percent year-on-year, reflecting persistently high oil supply and rising commercial crude stock levels. ”

Lower yearly oil prices are taking their toll on shale oil producers, with Q1 2016 seeing the first year-on-year fall in US production in eight years, but record rises in OPEC and Russian crude production have more than compensated for this drop.

Oil prices have shown some firmness in the run-up to a production ‘freeze’ meeting between a number of oil producing countries next week, but we do not see any real progress being made primarily due to an absence of a commitment by all major OPEC and non-OPEC suppliers. 

Even if output can be capped at January levels, this would still be exceptionally high. OPEC production was at record highs, at 33.4 mbpd, even when excluding Indonesia, and so too was Russian output. The deal, if agreed to, would therefore maintain the excess supply that is currently depressing oil prices, especially since a ‘freeze’ would not apply to crude oil exports.

Some of last month’s gain in prices are likely to be lost if production freeze agreements do not materialize

The report adds that there is a major risk related to both an agreement and/or implementation of production ‘freezes’ which could result in the gains of the previous month or so being pushed back down. It then goes states that Jadwa Investment has therefore maintained full year 2016 Brent forecasts at $33 pb with prices increasing to $44 pb in 2017.