Major oil producers are gathering in Doha for an April 17 meeting aimed at stabilizing volatile oil prices, which have plummeted 70 percent since mid-2014 and upended oil-dependent economies. The severity of the oil price shock has forged a somewhat fragile coalition of the willing to “freeze” production levels in a bid to reduce historic high levels of global oil stocks weighing on oil prices. The Doha initiative is the first time in 15 years that OPEC and non-OPEC producers have united to forge an agreement on oil production. Approximately 17 countries, representing almost 60 percent of global production, are expected to attend. Eleven of OPEC’s 13 members have committed to a freeze while Iran and Libya have recused themselves from participating. Non-OPEC producers include Russia, Azerbaijan, Kazakhstan, Colombia, Oman, and Bahrain.

By any measure, a production freeze at already high levels is a modest proposal that will do little to help rebalance the market. Yet, the prospect of heavy weights Saudi Arabia and Russia, two of the world’s largest producers, collaborating on a mechanism to control supplies has captured the market’s attention and lifted prices to four-month highs in the run up to the meeting.

Prices for international benchmark North Sea Brent crude plummeted from around $112 per oil barrel (bbl) on average in June 2014 to just $30/bbl in January, pressured lower by a relentless rise in global oil supplies outstripping demand. The advent of the U.S. shale revolution on the back of ever-rising oil prices, which saw production of light, tight oil add almost 4.5 million barrels per day (mb/d) to supplies in five short years, fundamentally altered the global outlook and prompted OPEC, the traditional swing producers, to reassess its policy options.

Led by Saudi Arabia, OPEC’s surprise decision at its November 2014 ministerial meeting to allow competitive forces to rebalance oil markets shifted the burden of oversupply to more expensive producers rather than cutting its own lower-cost output, as it has done in previous price shocks. A cut in OPEC production would merely make room for higher cost oil to replace it. OPEC’s initial expectations that a price decline to $70-80/bbl would force U.S. producers to shut-in production proved misplaced. It was not until prices reached $50/bbl in mid-2015 that producers started turning down the taps. The decline in output, however, has been much slower and more moderate than forecast, with technological advances and improved best practices reducing the cost threshold for some shale field operations closer to $40/bbl. Moreover, a majority of U.S. producers had hedged their future supply at relatively higher price levels, typically required by the banks to secure loans, which negated the need to rein in output as prices fell.

The drop in prices to below $30/bbl in January escalated calls for measures to help stabilize oil markets. Much to the chagrin of some members such as Venezuela and Nigeria, OPEC formally opted at its December 2015 ministerial meeting to stay the course and continue letting market forces reduce bloated supplies, which added further downward pressure on prices.

Orchestrated by Qatar, which currently holds the rotating presidency of OPEC, a meeting with two of the world’s largest producers, Saudi Arabia and Russia, took place February 16. Expectations that discussions would involve a potential cut in production by some OPEC and non-OPEC countries were later watered down to a “freeze in output” at January levels, with the caveat of broader participation of other key producers. The February 16 preliminary agreement included just four countries (Saudi Arabia, Russia, Venezuela, and Qatar) and plans to broaden participation were a key tenet for the next meeting, taking place Sunday. Saudi Arabia’s oil minister, Ali al-Naimi, said in February that “A freeze is the beginning of a process. If we can get all the major producers to agree not to add additional barrels then this high inventory we have now will probably decline in due time.”

The prospect of key OPEC and non-OPEC producers reaching a constructive agreement in Doha helped rally prices for benchmark Brent to four-month highs of $44.30/bbl on April 13. Rising prices have also been supported by modestly improved supply and demand fundamentals. The global supply overhang estimated at 1.5 million b/d in the first half of the year is forecast to decline to just 200 thousand barrels per day (kb/d) in the second half of 2016, according to the Paris-based International Energy Agency’s April Oil Market Report. In addition, latest data indicate that production declines of U.S. light tight oil are accelerating, the report said.

Managing Expectations

Just days ahead of the April 17 meeting, cracks among key players are emerging and the positive momentum is fading. Confusion surrounds the positions of long-time adversaries Saudi Arabia and Iran. Reports that Saudi Arabia did not consider Iranian participation critical to the agreement fueled optimism that an agreement was in reach. Saudi Arabia’s initial conciliatory stance was later contradicted by Deputy Crown Prince Mohammed bin Salman (MbS) in an interview with Bloomberg. When asked if Saudi Arabia will insist that Iran joins the production freeze, MbS replied “Without a doubt,” which triggered prices to drop from around $40.33/bbl to $38.55/bbl on April 1. However, Russia’s Interfax news agency reported on April 13 that a meeting between Energy Minister Alexander Novak and Naimi forged a consensus that Iran did not have to be part of any agreement. In response, prices set a new four-month high of just under $45/bbl. Saudi oil officials have made no public comments about the upcoming meeting since early April.

From the onset, Iran has said it would not participate in the proposed freeze agreement, with plans moving forward to ramp up production following the lifting of international sanctions at the start of the year. Iran is targeting an output increase to 4 mb/d in late 2016, from an average 2.86 mb/d in 2015, according to International Energy Agency data. So far, the country has raised production by around 450 kb/d post-sanctions, to 3.3 mb/d in March. Estimates for further increases of just 300 kb/d at most fall well short of the country’s stated target. Latest reports are that Iranian Oil Minister Bijan Namdar Zanganeh does not plan to attend the Doha meeting, but will send a representative to observe the talks.

Russia’s strong support for a freeze agreement is no doubt partly rooted in the country’s dire economic situation, worsened by falling oil prices and European Union sanctions. Yet, it has also likely seized the opportunity to serve as intermediary between rivals Saudi Arabia and Iran, reflecting its larger ambitions for a constructive role in the Middle East. However, the country’s tainted history of noncompliance with previous OPEC and non-OPEC production agreements may have diminished its credibility with OPEC producers. A late 2001 agreement with OPEC that called for a non-OPEC grouping of five countries to cut output by 500 kb/d failed miserably, with Mexico and Norway implementing the bulk of the cuts while Russia actually raised production by several hundred thousand barrels per day.

After expending a great deal of political capital to bring Saudi Arabia and Iran to the table, Novak’s positive spin on the Doha meeting has given way to a more pessimistic view in recent days. In a closed door meeting he downgraded expectations for a formal agreement. According to a Reuters report, one participant at the meeting paraphrased the minister as saying “The agreement will not be very rigidly formulated; it is more of a gentlemen’s agreement.”

Doha’s success will hinge on deescalating the conflicts among Saudi Arabia, Iran, and Russia and crafting the most credible accord possible. Expectations are relatively low at this stage for an all-encompassing, binding agreement. If no formal agreement is forthcoming, a conciliatory tone post-meeting with plans announced for further discussions, perhaps on the sidelines of the scheduled June 2 OPEC ministerial, would signal to the market the group is committed to the process, which would help temper the downside risk to oil prices and maintain $40/bbl as the new floor until stronger market fundamentals underpin the upward price trajectory of the past few months.