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'Several shortcomings' in Russia-OPEC deal, Barclays warns

February 18, 2016

Talk about a dead-cat bounce.

Brent oil closed 3% lower on Tuesday, erasing early gains spurred on by a deal between Russia and OPEC-heavy Saudi Arabia to freeze oil production at January levels. WTI crude is still below $30 and looks to settle below Monday’s close by about a nickle. The only market to benefit so far were Russian equities. But that is unlikely to last 24 hours. Barclays Capital warned early this morning that the Russia-OPEC deal might ultimately disappoint, saying it had “several shortcomings”.

The biggest of the two: OPEC member Iran was standing down. Iraq would likely follow suit.

Russia is not a member of OPEC. Only member states Qatar and Venezuela agreed to join the Saudi’s on what was initially Russia’s request to stop pumping oil in a market over flowing with crude.

Barclays’ commodity research chief Kevin Norrish said it was “vital to note” that there was not much incremental production expected from Russia, Qatar or Venezuela this year anyway. It was the Saudi’s that really mattered.

Russian output, although currently near a post-Soviet peak, is expected to remain flat this year after last year’s record breaker

Qatar’s output is declining, now at 655,000 barrels a day compared to 800,000 in 2011 and 668,000 last year.

Venezuelan output is also at risk of falling this year, especially given its need to import light crude to blend with its heavy crude production in order to sustain export volumes.

The holdouts are key here. And those holdouts are Iran and Iraq, which is where the big increases are likely in 2016. Iran and Saudi Arabia oil companies are state run, meaning they are tied to politics. And in these two countries, politics is religion. Saudi’s sunnis and Iran’s shiites are going at each other’s throats over Syria. Saudi Arabia is threatening to invade Syria to allegedly fight ISIS, which are Sunni, and begs the question of why? Iran is providing Russia and the Syrian government with support in fighting Sunni jihadis, including those that are “moderate” and only want to kill Syrian leader Bashar Assad and not all of Western civ. This political standout is not a minor one and will surely weigh on this oil deal having any legs to stand on.

In the business world, Iran oil exports are edging higher since the removal of sanctions. They are still roughly one million barrels per day below the pre-sanctions level and Iran would love to inch that up, make more money while they’re at it.

Comments from Iran’s vice president, Eshtaq Jahangiri, this weekend indicated that the country’s export orders have already expanded, meaning more Iranian tankers will be powering through the seas with its crude next month.

Their target is to reach 2 million barrels daily this year. The country “feels strongly entitled to restore its production to pre-sanctions levels rather than freeze output,” Norrish said in a note to clients this morning.

Then there is war-torn Iraq. They also have a hand in BarCap’s healthy skepticism about the Russia-OPEC deal. Oil output there is near record highs of a whopping 4.3 million barrels per day in January, according to OPEC, and the latest tanker indications suggest Iraqi oil exports touched a new record high above 3.9 million this month alone.

The Russia plan looks difficult to implement, but it still has some significance. For the first time since OPEC’s November 2014 announcement that it would pump and dump oil on world markets, the Russia-OPEC deal finally brins Saudi’s to the table.

The question is whether the Saudis are doing it to pressure Iran to the table. And when Iran says no, so will Saudi Aramco.

For Norrish, there is still some uncertainty over the outlook for supply in the minds of oil market participants and especially over Saudi strategy. “Up until now, they have been implacably opposed to any agreed limits on output,” he wrote today.

By Kenneth Rapoza

Source: Forbes

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