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Hopes rise for oil output freeze, but doubts linger

Last updated: 11:55 14 Apr 2016 BST, First published: 12:15 14 Apr 2016 BST

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Reports claimed Riyadh (above) and Moscow may freeze production without Iran

Hopes are high for a deal to limit the global oil glut and boost prices this weekend, but some analysts are warning investors not to hold their breath.

Oil prices have plunged to below US$30 a barrel from more than US$100 in late 2014 as Middle East oil sheikhs and US shale barons fought for dominance of the global crude market.

The falling prices have hit the industry hard as oil majors have slashed costs and investment, sparking misery for suppliers.

The impact on prices of the brinkmanship between OPEC and non-OPEC countries has worsened as Western export sanctions on Iran ended in January.

But the price of a barrel of Brent crude has rallied from US$27 a barrel to US$44 in the last few weeks as hopes rose that OPEC will relent to pressure to agree a freeze.

Oil prices spiked after news of a preliminary oil supply accord between Russia and OPEC ahead of this weekend’s larger meeting in Doha, Qatar.

Chief executive of Sun Global Investments, Mihir Kapadia, said: "Clearly this renewed optimism is an indication that markets expect a deal to be met at Doha after nearly two years of falling prices."

But others are not so sure, saying wrangling could still cause the talks to end in failure.

Analysts at Bank of America Merrill Lynch (BofAML) said: "Politics may trump economics again and a bearish outcome is also possible. Reduce risk into Doha."

The International Energy Agency added that any deal was unlikely to significantly affect the global supply-demand balance in the first half of 2016.

Saudi Arabia and Russia were already producing at or near record rates, the Paris-based IEA said.

No firm commitment

OPEC oil production rose 40,000 barrels per day (b/d) to 32.4mln b/d in March, driven by sanction-free Iran, according to a survey by energy data group Platts.

The April 17 meeting in the Qatari capital is expected to be key as OPEC and non-OPEC producers meet to discuss a plan to freeze oil production at January levels.

Saudi Arabia and Russia, as well as OPEC members Venezuela and Qatar, initially tabled the proposal in February to balance oil markets and support oil prices.

But resistance to cuts by Iraq and Iran - which is targeting production of 4mln b/d in the new Iranian year, which started March 20 - could be a problem.

Presently, 13 countries are set to attend the talks including Algeria, Azerbaijan, Bahrain, Ecuador, Indonesia, Kuwait, Nigeria, Oman, Qatar, Russia, Saudi Arabia, Venezuela and the United Arab Emirates (UAE).

But Iraq and Iran have not shown any firm commitment to the plan, while Libya -- whose production remains dogged by political unrest -- has declined to attend.

In March, a 110,000 b/d rise in Iranian output to 3.2mln b/d was the single largest increase in OPEC, eclipsing a drop from the UAE, Libya, Nigeria and Venezuela.

Iran has boosted production by 340,000 b/d since December, as it seeks to regain its former share of the global oil market.

More Iranian crude is poised to flow this month to Europe, buoyed by extra reinsurance coverage for shipments of Iranian crude oil.

In Iraq, oil output rose 30,000 b/d to 4.16mln b/d in March, largely due to substantially higher exports from the country's southern terminals.

Lower total volumes from semi-autonomous Kurdistan, where vandalism and attacks disrupted exports via a pipeline to Turkey, partly offset the increase.

Platts senior editor Eklavya Gupte said: "Iran and Iraq remain the big swing factors, having driven OPEC output higher in March, while Saudi Arabia has been more neutral, keeping production steady since January.

"Neither Iran nor Iraq has made firm commitments to the Doha talks on April 17, but their collective stance could be a decisive element regarding any agreement over a production freeze."

Common ground

On Thursday, Brent had dipped slightly to just over US$44 a barrel while West Texas Intermediate also edged lower to about US$41.7, due to higher-than-expected US stockpiles.

SP Angel noted that OPEC cut global oil consumption growth rates forecast in 2016 on Wednesday, which the broker said pointed to a larger supply surplus this year.

But Deutsche Bank noted that WTI edged above US$42 a barrel for the first time since late November as reports suggested Russia and Saudi Arabia may agree a production freeze without Iran.

"As we move closer to the Doha production meeting this Sunday, it's starting to feel like we're getting almost daily headlines like this, but ultimately much will hinge on Sunday's outcome," Deutsche analysts said.

BofAML said the collapse in oil prices to US$27/bbl provided common ground for producers to sit down and discuss an oil output freeze.

It estimated that a freeze would tighten global oil balances by 0.5mln barrels a day in the second half of this year and push prices above US$50 in the near term.

But the US investment bank's analysts said a bearish outcome in Qatar remains a possible scenario and advise investors to cut long positions before the talks in anticipation of a price fall.

They said in a note: "While we see room for cooperation between OPEC and Russia, we also acknowledge Doha could end up being a repeat of the December OPEC meeting.

"In other words, Middle East politics could once again trump oil economics. So should Saudi announce an additional output expansion in response to Iran's return to market, Brent prices could retrace to the $30-35/bbl range.

"But even under our base case of "no output freeze", long positioning is sufficiently stretched to warrant a near-term pullback below US$40/bbl. Given the uncertainty, we advocate reducing longs ahead of Doha."

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