The Russian Energy Minister Alexander Novak, however, has tied sustainment of the agreement to the performance of other large oil producers. Following the meeting, the Qatari and Venezuelan oil ministers flew to Tehran to convince Iran to support the freeze accord. Should it takes effect, the agreement could leave impacts on the sagging oil prices.
Its implementation is facing real challenges, however.
This analysis aims at bringing in spotlight the challenges ahead of oil output cap, as it tries to put on show the prospects of the Doha oil agreement.
Challenges ahead of oil output freeze
The Doha oil deal is marred by a set of challenges and setbacks which overshadow imagining a bright long-term outlook for it. The challenges ahead of the oil production freeze are as follows:
- The oil prices now are 70 percent lower in comparison to June 2014 oil sales. The major reason, the experts suggest, is the oversupply at the global oil markets. In fact, the excess in oil production has made supply surpass the demand in the markets and thus forcing down the oil prices. This is coming while the agreement reached by the large oil producers in Doha meeting urged them only to freeze output on the current levels rather than calling them to cut their production. Actually, the outcome of the meeting was a decision to impose a cap on the present oil production levels.
- A realization of the deal to freeze oil levels by the major crude producers, which intends to back the plummeting oil prices in the world oil markets, is heavily dependent on the support of all players of energy market because they not only could directly influence the global markets but also they could help buy support of smaller producers in the crude market.
- Once a freeze in oil production presses down crude supplies in the global markets and pulls the prices up, the mounting pressures on producers with unconventional output levels would observe a slowdown.
At the present time, with current oil prices, shale oil production is not economical and so it is likely that if in the long run the crude prices keep as low as the present rates, some of shale oil producers like the US and Canada would quit its production. A renewed oil prices hike could persuade them back to the shale oil production, however.
- Iran has restored its oil exports to the European countries now that it is being freed from the yoke of the Western sanctions, and for rational reasons it is resistant to the idea of output reduction upon lifting of the sanctions. Such a Tehran resistance automatically affects the oil supplies and the current low prices.
Iran has officially announced that it would spare no effort to support measures for curbing low oil prices but with a consideration of pre-sanctions oil production and market share, it is not interested to freeze crude supplies to the global markets. It is worth mentioning that Tehrans current production levels are far lower than its pre-sanctions crude sales, as its share in the supply market was hit hard by Western sanction. Actually, Iran expects the oil producers to understand that Tehran needs to reach its former oil production, namely pre-sanctions production, and also it needs the producers which took Tehrans place following the sanctions behave more responsibly and get back to their former production levels.
- Russia and Saudi Arabia, though are in need to work together in energy markets, are deeply divided over political issues and regional cases. Thereby, due to the political and security disaccords it is very unlikely that the two major oil producers in long terms agree on economic work.
- Saudi Arabia, for its huge spending on wars in Syria and Yemen, is still in desperate need of big money from oil sales. According to a report released by the Saudi Arabian Monetary Agency, which operates as the kingdoms central bank, as a result of dropping oil income, the countrys foreign reserves slid from $742 billion in October 2014 to $648 billion in the same month in 2015.
Furthermore, the Saudi budget deficit in late 2015 was posted as equal as 20 percent of the countrys GNP. According to the International Monastery Fund's (IMF) speculations, the Saudi Arabian foreign reserves could end within five years if the dropping oil prices see no restoration. Thus, it is very unlikely that Riyadh shifts approach on crude production levels as it counts the costs of the huge budget deficit.
- Thanks to huge oil reserves and good investment in oil production facilities, Saudi Arabia could keep the current output levels, defying the low prices. But the same process is highly strenuous for such producers as Iraq, Venezuela and some others because they need large-scale investments in different parts of their energy sectors, and as long as the market prices are this low, the large oil companies find no motive to invest in these countries energy projects. This could affect their production levels and drive them out of exports cycle. So, the Saudis would possibly ignore the oil cap proposal in a bid to push their rivals out of the market and gain more diversified oil purchasers.
- There is no organized relation between Russia, as a non-OPEC member and one of the worlds largest oil suppliers, and OPEC's countries. In fact, Moscow holds individual oil ties with the OPECs members and is not in regular connection with the oil organization.
Prospects of freeze deal
Though freezing the oil production is a proper pathway to affect the low oil prices in the market, the agreement to cap the crude supplies to January levels would do little to balance the supply and demand in the current year, and is not enough to sell out the 600,000 excessive barrels per day that are predicted to flood the market this year. Actually, the precondition for realization of freeze proposal is that any increase in oil prices should come as a result of a really reduced oil production. In other words, the shrink in production must be enough to pull up the global crude prices.
Additionally, freezing the oil levels takes commitment of all of major oil suppliers. The present situation indicates that it is difficult to unite the major production players, however. Therefore, with regard to the challenges hampering the freeze plan, the oil producing countries should consider other solutions to control the oil markets because if the plan to freeze the current oil supply is not accompanied by other methods, it fails to leave a serious and long-term remedial influence on the oil market.
By Alwaght
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