Investors remain cautious on the impact of a cap in production. January's production has been among all-time records for major producers such as Russia and Saudi Arabia. Therefore a simple freeze would in fact worsen the current glut. In fact, Adel al-Jubeir, Saudi Arabia's foreign minister, told AFP that "if other producers want to limit or agree to a freeze in terms of additional production that may have an impact on the market, but Saudi Arabia is not prepared to cut production. [...] The oil issue will be determined by supply and demand and by market forces. The Kingdom of Saudi Arabia will protect its market share and we have said so". This announcement caused oil price to drop by 3.5 %.
Helima Croft at RBC told the Telegraph that “Saudi Arabia has strategically placed the ball back in the court of their regional rival, Iran, and by extension, Iraq”. He also said that the production freeze between the four nations is largely symbolic as they will struggle to maintain current production levels anyhow. Tony Nunan, the oil risk manager at Japan's Mitsubishi Corp in Tokyo told The Week that "Everything is pointing to the end of this year [before there is an agreement] when Iran gets to 4 million barrels per day. By that time, the pain will be so great everybody will come to the table [to agree output caps]. Production cuts also require countries to actually implement what was agreed upon. For instance, Russia has previously been accused of not backsliding on the commitments to freeze production, and defended itself by saying that the government had little control on private oil companies that operate on its territory.
Later this week on Thursday, the oil price lost 4 % as U.S. government data showed that national crude stockpiles rose by 2.1 million barrels to reach a record 504.1 million. This is the third week of record high in the past month, and overshadows the production freeze proposed by rival producers. Nevertheless, Bank of America Merrill Lynch and well as U.S. shale producers believe that oil could rise to $47 a barrel by the summer. This forecast partly relies on the assumption that the output freeze will in fact be implemented.
by Aurelien Meyer