ETF Securities Research Blog

Doha – Desert storm in a teacup

Expectations at the Doha OPEC Summit were for a simple rubber stamping of the agreement to freeze OPEC production but this didn’t happen. The scaling up or Iran’s production is unlikely to have much impact on global supply in the short-term with global supply falling into deficit in Q3-Q4 2016.

The acrimony between Iran and Saudi was evident as Iran did not even attend the meeting. Iran has refused to freeze production and Russia has sympathised. Saudi has picked up market share lost by Iran when sanctions were imposed and Iran sees that it is only right that they have the opportunity to regain this share. We believe the Saudi Arabia has taken such a hard-line to protect its own interests, the current oil price is painful for them given that their fiscal costs of production are around $100/bbl, pushing their budget balance to -19% of GDP for 2016 according to the IMF.

Currently Iran has managed to scale-up production from 2.88mbpd in December 2015 to 3.29mbp in March (404k change), slightly below the consensus expectations of 500k. In the short-term we believe production in Iran is unlikely to move substantially higher as production is close to maximum potential with current infrastructure. A couple of projects assisted by China could push Iranian production up by 200kbpd in 2017.

The Saudi/Iran proxy war in Syria and Yemen isn’t helping stability within the region and there is a general skepticism amongst international banks and oil exploration and production companies over Iran’s nuclear deal. It is therefore likely that additional production infrastructure will not come online in the shorter term.

June 2nd is the next OPEC meeting but it’s unlikely a production freeze will be agreed at that point either. The oil price initially dived 7% reflecting a knee-jerk reaction by investors but has since settled at -2.5% at time of print. We expect little impact on market balances and we expect a global supply deficit by either Q3 or Q4 2016.