DOHA, Qatar—The next big move in the price of crude rests with leaders from major oil-producing nations meeting this weekend and whether global markets decide to trust whatever they say.
Weeks of anticipation that the countries could reach a deal at a conference in Qatar already has helpedlift oil prices from their lowest levels in more than a decade. U.S. crude prices have rallied 54% since February, driven largely by reports that the big producers were agreeing to meet to discuss an output freeze after months of discord.
Yet plenty of skepticism persists on their ability to agree and stick to a production freeze. U.S. oil prices fell 2.7%, to $40.36 a barrel, on Friday, their largest slide in nearly two weeks, on doubts that the major crude-exporting nations can compromise.
Key participants, including Russia and Saudi Arabia, the world’s two biggest producers, have said little about what they are going to discuss, how they will define and enforce a freeze and who would be bound by any deal.
U.S. oil producers also seem skeptical that the meeting will produce results with a meaningful impact. Many have been keeping operations idle despite the recent price increases that in the past might have encouraged them to ramp up production. The number of rigs in the U.S. drilling for oil continues to decline, falling on Friday to 351, down a third from the start of the year, according to oil-field-services firm Baker Hughes Inc.
“We’re not convinced that we’ve tested the ultimate bottom,” Thomas Jorden, chief executive of Cimarex Energy Co., said at an industry conference in New York this week. “I’d like to think it’s only up from here, but we haven’t seen the fundamental support for that thesis.”
Some producers have bigger problems. Goodrich Petroleum Corp., a Houston-based oil-and-gas firm, on Friday became the latest energy company to succumb to low prices when it filed for chapter 11 bankruptcy protection. The price of oil has fallen 34% since June.
Since the downturn began, about 60 North American oil-and-gas companies have entered bankruptcy court, involving nearly $20 billion in debt, according to law firm Haynes & Boone.
While jittery markets are likely to react on Monday morning to almost anything that comes out of Doha, longer term, the effect may be more muted unless the meeting results in specific commitments from participants and a mechanism to back those up.
Even a production freeze may not move output, in the near-term at least, from levels that have left global markets awash in oil.
The International Energy Agency said in a report on Wednesday that “any deal struck won’t materially impact the global supply-demand balance” during the first half of 2016, as both Saudi Arabia and Russia already are producing at or near record rates.
Saudi Arabia pumped 10.19 million barrels a day in March, a decline of 30,000 barrels a day but still close to its peak levels, while Russia’s output hit a three-decade high in March at 10.91 million barrels a day, according to official statistics.
At the same time, Iran indicated recently that it doesn’t want to cap production until it returns to presanction levels. The country is trying to boost its oil exports by 500,000 barrels a day in the next few months.
Most members of the Organization of the Petroleum Exporting Countries are attending the Doha meeting. OPEC in 2014 abandoned its role adjusting production at its own regularly scheduled meetings. Instead, it and other big producers started duking it out around the world over market share.
An agreement in Doha would be at least a symbolic detente. It also could put a line under prices, which have risen 9% this year amid signs that lower prices are snuffing out production on its own.
For oil watchers, this weekend’s Doha talks have taken on similar importance to OPEC meetings of old. But those confabs tend to be relatively well-choreographed affairs. There is a scheduled meeting, a break for lunch and then a news conference. Generally speaking, oil watchers know what to look for: Is OPEC cutting production and by how much?
This weekend, there is no script. Officials involved in the meeting said participants still are divided on some parameters, including which output levels could be frozen and for how long, and how any freeze would be enforced.
Producers are “confident that Doha will have an agreement, but the baseline is still definitely debatable,” said one Persian Gulf oil official who plans to attend.
Commerzbank AG analysts said in a note Friday that they expect some sort of deal. But it “will probably not include any concrete figures or obligations, let alone any sanctions to be imposed in the event of noncompliance,” they wrote. “In other words, the meeting will do nothing to change the current situation on the oil market.”
Still, some participants said they are considering options aimed at convincing the world they mean business. One idea would be to allocate individual output limits for each producer. On paper, that system would look similar to country-based quotas once used by OPEC. But the mechanism was abandoned by the cartel four years ago. Actual production is often a closely guarded secret, and outside verification is difficult.
Some participants are expecting a softer target: a production number that would send a message to the world that participants were committed to the spirit of the deal. A collective “ceiling,” a number that individual countries would commit to not broaching together, is also an option. That is how OPEC currently communicates its output decisions.
“You don’t want to look at this as a quota, but as a short-term guideline,” another Persian Gulf official said.
Then there is the issue of the baseline. If countries agree to freeze production, there has to be some agreement on what output is now. Would it be best to fix that using an average output over the past few weeks or months? If individual countries can’t be trusted to report their real output, whose numbers will be used to measure compliance?
Some delegates from OPEC have suggested their own collection of secondary sources, long used by the organization’s Vienna office in its monthly report. Qatar has invited the group’s secretary-general, Abdalla Salem el-Badri, to attend the gathering, according to people familiar with the matter, to brief the meeting on OPEC’s methodology.
OPEC’s own production fell by 203,000 barrels a day from January to February due to unusual disruptions in Iraq. To avoid such distortion, some participants support the use of a rolling average, perhaps over the course of three months.
Participants may even agree on a cap but “with no figure whatsoever” and opt for general commitment to stop increasing output, one delegate said.
