FALSE FREEZING

The market has actually not reacted to the agreement between Russia, Qatar, Venezuela and Saudi Arabia to freeze oil production, as oil prices still fluctuate in the range of 30-35 dollars per barrel.

Such a move was initiated by Venezuela, which is suffering from low oil prices more than any other oil-producing country. In the past year, the country's GDP decreased by 5.7 per cent, according to the Central Bank of Venezuela. The forecast given by the IMF for the current year is even bleaker - the GDP of this South American country could decline by 8 per cent. The country was forced to embark on a massive devaluation - the official dollar exchange rate was raised from 6.3 bolivars to 10 bolivars. Still, one cannot buy dollars at this rate because on the black market, the dollar is traded at 1,000 bolivars. The country is predicted to face a massive inflation of 720 per cent this year. There are well-founded fears that the country will not be able to service its external debt, which will lead to a default with all the consequences that come with it.

Only a sharp increase in world quotations for "black gold" can save Venezuela, which is 90-95 per cent dependant on oil sales. But President Nicolas Maduro's efforts to achieve a reduction in oil production do not resonate even with OPEC colleagues, not to mention the countries outside the cartel. However, initial reports about reaching a certain agreement - to be joined by Russia, in addition to OPEC members - raised some hope and led to a slight increase in prices. Especially since United Arab Emirates and Nigeria promised to join the freeze. But the primary analysis of the preliminary agreement has shown that the freezing of oil production will not make much impact on the market.

The countries agreed to freeze oil production at the level of 11 January, but it was at this period that the historical production highs in Saudi Arabia (10.2m barrels per day) and Russia (10.9m barrels) were reached. Thus, the decision will not contribute to the reduction of excess oil on the world market in the light of the weak consumption growth. According to the International Energy Agency (IEA), oil demand growth will decrease this year to 1.2m barrels per day, down from 1.6m barrels last year.

In the meantime, it is not clear how other major oil producers - primarily Iran and the United States - will respond to such an agreement. The position of Iran, which has only recently released itself from Western sanctions and is seeking to recover its share of the world oil market, is going to be the main factor. Therefore, the oil minister of Venezuela, which initiated production freezing measures, held talks with his counterparts from Iran, Iraq and Qatar in Tehran.

The first reaction of Iranian Minister of Petroleum Bijan Namdar Zangeneh was quite optimistic: "We welcome the cooperation, both with the OPEC countries, as well as with non-member states. Although this is the first step, it should not be the last. It could mark the beginning of further cooperation between OPEC and other producers to improve the situation in the oil market".

According to Reuters reports, Iran was offered special conditions, including either a consent to a limited increase in production or linking production growth to the future recovery in oil prices. Apparently, Iran was ultimately not satisfied with these proposals. This is evidenced by Zangeneh's statement to the effect that the proposal of Russia and several OPEC countries to freeze oil production at the January level was ludicrous. "This is ridiculous, they propose to freeze oil production and call for this, having in mind the production at a level of 10m barrels a day, whereas Iran alone produces 1m barrels a day," the minister said.

The US position is also sceptical: US Secretary of Energy Ernest Moniz and the State Department's Special Envoy Amos Hochstein said they did not see the point in freezing oil production at the level of January, because the market had already had a surplus of crude oil.

Furthermore, according to Hochstein, the government has no right to interfere in the work of companies and artificially regulate the production and export of oil.

On the whole, both investment banks and rating agencies, including DeutscheBank, Commerzbank, Citi, Standard & Poor's and others, expressed their doubts about the possibility of raising oil prices by freezing production. Moreover, Standard & Poor's has lowered its 2016 forecast for the Brent crude oil average price to 40 dollars per barrel, down from the previously expected 55 dollars per barrel. The forecast for the average price of Brent crude oil in 2016-19 was lowered to 46 dollars per barrel, down from the previously projected 65 dollars per barrel. For prices to increase, it is necessary to have a balance of supply and demand or even a lack of oil on the market.

An analysis performed by Trend News Agency on the basis of IEA data shows that from 2004 to 2014, world oil demand has always exceeded supply by an average of 4 per cent, as a result of which prices grew steadily (see Table). Now, however, there are no reasons to expect a drastic increase in the demand for oil, given the slowdown in economic growth in China and the intensification of crisis in the relationship between oil-producing countries.

Theoretically, a way out of this situation could be a common decision of the oil-producing countries to cut production. This initiative was put forward by Oman's Minister of Oil and Gas Mohammed Ahmed al-Rumhi, who proposed that the OPEC countries and non-member states cut production by 5-10 per cent in order to stabilize the market. Oman itself is ready to make commitments to reduce its production by 100,000 barrels per day. However, major oil producers fundamentally disagree with this approach. In particular, Saudi Oil Minister Ali bin Ibrahim Al-Naimi has said that the Kingdom will not agree to reduce oil production as it does not believe that a sufficient number of oil producing states will follow suit. According to him, there are ways to restore balance in the commodity market more effectively than cutting production in Saudi Arabia. Iran also intends to continue actively increasing its output with a view to bringing it to 4.6m barrels per day by 2021 from the current 3.5m barrels. 

The situation is also being aggravated by the production of shale oil in the USA, which was one of the causes of the current crisis. Although more than 1,000 out of 1,600 active rigs have come to a halt in the USA, the technology used to extract shale oil allows them promptly to resume operation. OPEC Secretary General Abdullah al-Badri has also warned about this. "I don't know how we are going to live together," al-Badri said. "If prices go up," he said, "the price rally will be capped by US shale oil". According to him, OPEC has never had to deal with an oil source that can respond so quickly to a change in the price of oil and make up for is shortage. This factor essentially hampers the cartel's ability to control the price fall by reducing production. According to IEA, despite a decline in shale oil production expected in the USA in 2016-17, the figure will subsequently be growing until 2021, as the USA will be the main driving force of growth in global production. This is why there is no sense to expect an essential price rise in the coming years. According to forecasts by IEA chief executive Fatih Birol, the price of oil could rise to 80 dollars only by 2020. 

Under the current circumstances, the only possibility to increase the oil price is to have an excess of demand over supply. For this purpose, a steady growth in oil consumption is required in the first place. However, there are no visible signs of this: China's economy is slowing down its growth rates, thus putting a brake on practically the entire world economy. The results of 2015, both in Europe and the USA, proved to be not so rosy in terms of economic growth as they were in the first half of 2015. The likelihood of consensus with major oil producing countries on any reduction in oil output is also very low. In addition to the US factor with its shale oil and the state unwilling to regulate the operation of private companies, we should not forget about deep political disagreements among the Arab monarchies of the Gulf led by Saudi Arabia and Iran, as well as tensions in relations between Saudi Arabia and Russia against the backdrop of the developments in Syria. In such circumstances, none of the parties wants to miss even the tiniest part of this sphere actually waging a war in the oil markets. 

So, we have no more reasons to await an oil-based prosperity in the near future: the "golden age" has come to an end for the oil producing countries.