Oil production freeze is only the first step

17/02/2016 05:57 AST

Oil ministers from Saudi Arabia, Russia, Venezuela and Qatar announced on Tuesday an agreement to freeze their oil output levels provided other major producers follow suit. The deal would freeze Saudi and Russian production at the record rates reported in January and is unlikely to be accepted by Iran in its current form since the country escaped from sanctions only last month.

The agreement is provisional (depending on adherence from other oil producers) and unambitious (freezing rather than cutting production), which has led some commentators to dismiss its importance.

But experience suggests production agreements are normally reached in stages, often after several earlier attempts have failed or been only partially fruitful. Successful agreements often exploit the temporary weakness of specific producing countries and at least some past participants have reserved the right to increase output beyond agreed levels in future.

Successful production agreements are usually of limited scope and duration, deferring more complicated and intractable issues about production allocations for later. In that sense, the production freeze announced in Doha could be seen as a stepping stone toward a more ambitious and comprehensive deal in a few months' time.

The depth and duration of the price slump have taken all producers by surprise and are inflicting intense pain on all oil companies and exporting countries.

OPEC's original strategy of maintaining high production envisioned a modest and brief drop in prices that would quickly curb output from US shale formations and other high-cost producers and then restore the organization's market share.

The strategy may now be working, with reports of a downturn in US shale output and a sharp drop in non-OPEC exploration and production spending. But the strategy has proved far slower and costlier than any OPEC member thought when prices started to slide in 2014.

There are still doubts about how quickly the market will rebalance and whether prices will recover, with most observers predicting no rebalancing until the second half of 2016, 2017 or even 2018.

OPEC's strategy has inflicted a "good sweating" on the oil market but also on members of the Organization of the Petroleum Exporting Countries itself.

The good sweating has in turn made most OPEC and non-OPEC producers more flexible and amenable to the idea of a production agreement, at least in principle.

Arab News