Ahead of the doomed Doha talks last weekend, Russia and Saudi Arabia said they were willing to discuss freezing oil output, but less than a week later both have threatened to ramp up production. On Friday, the head of the Oil Industry and Markets Division at the International Energy Agency (IEA) told CNBC that he believed both producers will continue to “pump as much oil as possible.”
“In the post-Doha world, when we’re still in what is essentially a free market for oil, they (the Russians) will pump as much oil out as the market will absorb and the Saudis have said much the same thing,” the IEA’s Neil Atkinson told CNBC.”
“We’re back to where we were before Doha where people produce what they can, sell what they can for whatever price they can achieve and the market takes care of the surpluses in time.”
Atkinson noted that “as far as the Russians are concerned, even in the run-up to Doha when they were going to be party to an agreement to freeze production, they were actually pumping up production anyway.”
Atkinson’s comments come less than a week after the anticlimax of talks between OPEC and non-OPEC producers in Doha last Sunday, at which hopes of a freeze of oil production levels were dashed. OPEC leader Saudi Arabia said it would not freeze output unless regional rival Iran did the same but Iran refused as it is keen to get its own oil industry back on track after years of economic sanctions.
With tensions between the OPEC members rising, oil analysts have speculated on what could happen at the next meeting of the 13-country group on June 2.
OPEC officials said on Thursday that they might discuss an oil production freeze again when the group meets then, but, once bitten and twice shy, oil markets failed to react much to those comments following the failure of talks at Doha. What’s more, just earlier in the week, Saudi Arabia, Iran and non-OPEC producer Russia all threatened to ramp up production.
Atkinson noted that Saudi Arabia had spare production capacity (of up to 2 million barrels a day) as well a couple of other Middle Eastern producers such as Kuwait and the UAE but that “apart from that there is no spare production capacity essentially anywhere in the world.”
All oil producers have been hit hard by the drop in oil prices since mid-2014, largely down to a glut in supply and lagging demand, but some have been hit harder than others. Those with higher production costs, such as U.S. shale oil producers, have particularly felt the hit and have responded by closing rigs, cutting production and exploration.
Atkinson believed that oil markets would come close to a balance in the second half of 2016 with U.S. shale oil production expected to fall further this year. However, he said there was a possibility that the U.S. could ramp up production easily again in future.
“In our numbers, the U.S. by itself is going to shed something like 450,000 to 500,000 barrels a day in 2016 versus 2015,” Atkinson said, “it’s coming down before our very eyes.”
“There are three throngs to this U.S. story. Firstly, we got the run-up to this production wrong – nobody understood the pace at which U.S. production would rise. Secondly, we’ve had difficulty understanding the fallback as prices fell and when prices do begin to ramp up again, maybe we’re going to misunderstand how quickly they’re able to come back into the game.”
Atkinson noted that the U.S. could hold the key to rebalancing markets. “The U.S. is perhaps the most interesting producer because it’s so volatile and dynamic and that holds the key in many respects to the rebalancing of the market.”