By Nikola Kedhi.
Commodities have been on a steady decline for more than a year now. In particular, oil has suffered the most with a drop of approximately 70% since 2014. World’s greatest oil producers have agreed for the first time to put a temporary halt to oil production, leading market participants to assess the impact of this decision on prices.
On Tuesday, Saudi Arabia’s oil minister declared that several OPEC members were negotiating on a deal that would put a freeze to oil production, which means that they will not increase output for the foreseeable future. This was seen as the only way to bring stability to the markets, which have been pretty shaken recently, largely because of the declining oil prices. During the past year, OPEC has repeated several times that the organization would proceed with pumping more oil as originally planned. Thus, the latest announcement came as a surprise to many who believed that oil prices would stabilize only after getting to $20 a barrel.
The Financial Times reports that the agreement was reached in a meeting behind closed doors in the capital of Qatar, Doha. Among the initiators of the deal were Venezuela, Saudi Arabia, Qatar, Kuwait and Russia (even though it is not a participating country). The following day, Iran declared that it will not be bound by such arrangement. However, the Iranian oil minister said that his country supports any efforts made to calm oil markets.
After the sanctions were lifted, Iran made plans to increase oil production. According to the Wall Street Journal, oil output has already gone up by 15% in Iran, much to the dismay of investors worldwide. Moreover, this week Iran began exporting to Europe for the first time since 2012. Nevertheless, two anonymous Reuters sources have confirmed that it is likely OPEC will offer special terms to Iran in return for accepting the freeze deal.
US oil prices increased to $31.53, while Brent crude reached $35.55 before the OPEC meeting. However, they closed the day down to $29.04 and $32.18 respectively. The decrease was due to the skepticism that the agreement would actually work. There are two reasons why investors do not think that this oil freeze will be successful in increasing prices. First of all, the deal states that all oil producing countries must limit further production. The problem is that countries like Iran have their own internal agendas. Furthermore, the Middle East is overwhelmed by war and conflict. Thus, it seems unlikely that there will be a unanimous decision. Secondly, even if these countries are ready to freeze production at the January level, according to an analysis by the Wall Street Journal, there would still be an oversupply of 300 million barrels a year, not including oil stored in tanks.
Meanwhile, the latest initiative by OPEC has been welcomed by the stock markets both in the US and Europe. On Tuesday, NASDAQ, Dow Jones and the S&P 500 rallied 2.3%, 1.4% and 1.7% respectively. On Wednesday, S&P gained 1.6%, the Stoxx Europe 600 added 2.6% while the Emerging Markets Index increased 0.7%. This marked the first week for 2016 that markets increased several days in a row.
The first act of cooperation in 15 years among oil producers was met with various degrees of suspicion and mixed doses of hope. Nonetheless, it may be the first step towards a process that will bolster oil prices and bring some stability to financial markets.