Hopes on the part of investors, oil companies and oil exporting nations for a negotiated “freeze” in global output melted away on Sunday after 16 major petroleum producers meeting in Doha, Qatar failed to reach an agreement, possibly setting the stage for further weakness in crude oil prices.
Saudi Arabia, the world’s largest oil exporter, refused to go along with the plan — which would have capped production at January levels for the Organization of the Petroleum Exporting Countries as well as non-OPEC producers such as Russia. News agency reports said that in talks that lasted ten hours longer than scheduled, the kingdom would not limit its own output if Iran did not do the same. But Iran, which did not even attend the Doha meeting, has said it is determined to crank up production now that a deal to limit its nuclear program has resulted in a lifting of international economic sanctions.
“The ongoing geopolitical tension with Iran is clearly a key consideration in Saudi Arabia’s oil policy, preventing it from joining in even a vague agreement to freeze oil production at already inflated levels, and knowing that an oil price drop is likely as a result,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University.
The oil minister of Qatar, Mohammed bin Saleh al-Sada, told the press Sunday that the group of nations assembled “needs more time” in order to reach an agreement, according to Reuters. It remained unclear Sunday when negotiations might resume.
The fundamental cause of turmoil in oil markets since late 2014 has been too much of the stuff. With OPEC refusing to cut output, with more and more oil coming from non-OPEC producers such as the United States — and, more recently, with Iran’s production increasing as the country emerges from international sanctions — the world has just kept producing more oil than anyone wanted to consume. And prices have, accordingly, tanked.
The much-watched meeting in Doha on Sunday was meant to change that situation by bringing many OPEC and non-OPEC countries together to agree to an oil production “freeze” — building on an agreement reached in February between Saudi Arabia, Russia, Qatar and Venezuela. Under the proposed freeze, participating countries would have produced only what they did in January, and no more, up through October.
Brent crude, the global oil benchmark, tanked to below $ 28 per barrel in January — a 12-year low — as the oversupply problem remained unabated, but prices have since surged to a recent quote of $43.10 for Brent. Much of the reason has been the February agreement and expectations that the Doha meeting would be successful. The failure of the meeting could threaten recent oil price gains.
“There will likely be an oil market response given expectations but if people had been listening to the conditions placed on the talks by the Saudis and the Iranians it shouldn’t be much of a surprise,” said Sarah Ladislaw, director of the energy and national security program at the Center for Strategic and International Studies. “A freeze will only materialize when producer incentives are aligned or when producers simply can’t produce more and need a convenient excuse for their stagnant or declining production.”
The United States, which has surged in recent years to become the world’s largest producer of crude oil and other petroleum liquids, did not take part in the Doha meeting. In the U.S., continuing low oil prices have begun to impair shale oil production, somewhat alleviating the global oil glut.
While a Doha agreement would have been quite significant in that it would represent a measure of coordination between OPEC, which produces more than a third of the world’s oil, and Russia, the second-largest producer, it alone may not have altered the global oil math much.
“With Saudi Arabia and Russia already producing at or near record rates and very little upside seen apart from Iran — which has vowed to ramp up production to a pre-sanctions level of 4 [million barrels per day] — any deal struck will not materially impact the global supply-demand balance” during the first half of this year, the International Energy Agency (IEA) wrote of the Doha meeting last week.
The IEA, an influential voice in oil markets, believes that oil demand and supply will rebalance substantially later this year. It expects a 1.2 million barrels-per-day growth in oil demand in 2016, combined with declining oil output in countries such as the United States, whose shale oil upstarts have been hurt by low prices, to be the key factor.
The world produces about 96.4 million barrels per day of oil, according to the IEA’s latest report, and demand is just 94.8 million barrels per day, as of the first quarter of 2016. However, by the end of the year, that demand is expected to rise, leaving overall demand for the year at 95.9 million barrels per day, which would represent a tightening of the market, assuming that supply does not increase further.
In the United States, citizens have benefited from the turmoil in oil markets — the U.S. Energy Information Administration just forecast that summer gasoline prices will average just $2.04 per gallon nationwide. Last year, they were at $2.63 per gallon.
In the longer term, though, all this focus on how much oil the world pumps daily could be missing something.
Broader trends also are a key part of the destabilization of the oil market of late, including little growth in oil demand in advanced economies. “Rich countries’ oil use peaked in 2005. Developing countries’ oil demand is moderating,” Amory Lovins, chief scientist of the influential energy tank Rocky Mountain Institute, wrote last year.
One reason, Lovins notes, is that cars have gotten considerably more efficient, using less gasoline. And the beginnings of an electric vehicle wave is clearly apparent across the world. These vehicles won’t use any oil.
“Oil demand may indeed rise some more, but not durably — too many savings and substitutions are nipping at it – and the long-term trend is not good for suppliers when India’s Energy Minister, Piyush Goyal, has announced a goal to make every Indian auto (new and old) electric by 2030,” Lovins said by email. “China has similar ambitions, both aim to wring waste out of their trucks and logistics, and U.S. EVs and new mobility business models are burgeoning.”
In the long term, then, just how much oil each country pumps may not be the only thing that parties gathered in Doha have to worry about.
–Steven Mufson contributed to this report.