THE FREEZE FAILED

The oil market is gradually, but more importantly, consistently reviving. Oil prices have settled at around 40-45 dollars per barrel, striving, at times, for a new height of fifty dollars. And even the failure of the negotiations between OPEC countries and oil-producing states that are not members of the cartel to freeze the level of oil production, which took place in Doha in mid-April, could not undermine this positive trend.

The idea of freezing production was actively promoted by Venezuela and Russia, and in February, Saudi Arabia and Qatar gave their preliminary consent. However, most analysts were primarily interested in the position of Iran, which has been actively increasing production and export of oil since the lifting of sanctions, as well as the United States with its shale oil, the uncontrolled growth in the production of which became one of the main factors of collapsing prices. Although both countries supported the idea of freezing oil production, they are not in a hurry to join it. As a result, before the final round of negotiations, the consent of 18 oil-producing countries, including 11 OPEC countries (except for Iran and Libya) was received.

Details of the upcoming agreement were disclosed to TASS by Azerbaijan's Minister of Energy Natiq Aliyev the day before the alleged agreement. According to him, the draft agreement provides for a freeze on production until October at the level of January 2016. "This is a gentleman's agreement, where all countries realize that the observance of the established norm of production meets the common interest. It does not provide for monitoring mechanisms, and each country should follow its implementation," Aliyev said, noting that Azerbaijan is ready to join the agreement.

The energy minister said that after the successful signing of the agreement, the price of oil will slowly and progressively move to the level of 50 dollars per barrel by the end of 2016.

And when almost everyone was waiting for a purely formal statement on the already agreed document, the signing fell through.

Russian Energy Minister Aleksandr Novak blamed the failure of the agreement on Arab monarchies that put forward additional demands: "We have no aim to ensure that 100 per cent of oil exporters are involved in the deal, those who want it - they join it. Demanding that everyone must be involved is not quite correct and not entirely appropriate," Novak explained, referring to Saudi Arabia's demand to involve Iran in the freeze.

According to the Financial Times, the fateful call to the oil minister of the kingdom, Ali al-Naimi, demanding rejection of the freeze was made by the second Crown Prince and Defence Minister of Saudi Arabia Muhammad bin Salman.

The position of the Arab monarchies was announced in Doha by Qatar's Minister of Energy Mohammed bin Saleh al Sada: "A freeze on production could definitely be effective if major producers from OPEC like Iran and others, as well as countries outside of OPEC were included in the agreement. This would help to accelerate the market balance."

As a result, they decided to postpone the freeze until the summer in order to consider the issue at a summit of OPEC in June and then involve other oil-producing countries. At the same time, many experts were initially sceptical about the opportunity to reach agreement on freezing production and the real impact of this process on the market.

The first thing to take into account is the geopolitical confrontation between Saudi Arabia and Iran. For the Islamic Republic, the main goal now is to restore its own oil production and export. According to Iranian Oil Minister Bijan Namdar Zanganeh, Iran will not freeze production and aims to restore its position on this market.

Since the agreement on Iran's nuclear programme and the lifting of some of the sanctions, the production level has increased from 2-2.3m barrels per day to 3.2m, but the goal is to reach 4m barrels. And by increasing production and export, Iran is ousting mainly Saudi oil, offering a fairly significant discount (in the range of 2-5 dollars, depending on the grade of crude oil and the sales market). And perhaps, the main factor in Saudi Arabia's consent to the freeze was the intention to limit Iranian production, and after the latter's refusal, the freeze no longer made sense.

From the other purely economic side, the freeze would have no strong impact on the market, as the level of production was planned to be frozen at the level of January 2016, which saw the peak level of production in Russia and Saudi Arabia (10.9m and 10.2m barrels per day respectively). So, there was no radical solution to the question of achieving a balance between supply and demand on the market where an oil excess of 1.5-1.8m barrels a day is being observed.

One way or another, the world market albeit slowly, but steadily is moving towards equilibrium, and the freeze on production could only accelerate the process. According to the Russian minister of energy, "if you do not make efforts, the market will balance by the second half of 2017. A collective decision to freeze production will speed up this process by three to six months, i.e. before the beginning of 2017, due to growing demand and increasing proposals".

But do not forget that without Iran and the United States in the agreement, production volumes will be actively replaced by these players. And this means that there is no point in hoping for a major breakthrough in the issue of freezing production at the OPEC summit in June.

In any case, almost all manufacturers and analysts expect a balance between supply and demand by mid-2017, which will steadily push oil prices higher. The head of Russian Lukoil, Vagit Alekperov, said that the oil price has already reached the bottom at the level of 27-28 dollars per barrel and will start the next year from 50 dollars.

Analysts see the reason for the increase in the price of oil in the fact that on the one hand, there is a speculative factor, which has always played a significant role on the oil market, and on the other - fundamental factors of declining supply, for example, the continuing fall in production in the US and Canada along with growing consumption in China, were confirmed.

Plus, the strike of oil workers in Kuwait coincided quite conveniently with the failure of the negotiations in Doha, and as a result, almost 1.5m barrels of oil fell out of the market, and it came to a balance in the two days of the strike. Accidentally or not, the news about the strike actually nullified the failure of the Doha talks and the prices remained in the range of 43-45 dollar again. And in the next few days before the termination of the strike, the market became accustomed to the failure in Doha, realizing along the way that the freeze would not actually produce much effect.

But oil producers managed to make good money on rumours. According to Bloomberg, from the moment of the first rumours that Saudi Arabia and Russia are consulting on freezing production, quotes soared by 29 per cent. As a result, the largest oil-producing countries made 32bn dollars more, of which Russia earned 3.7bn, Saudi Arabia - 3.3bn, the US - 3bn and Canada - 1.5bn dollars.

At the same time, the threat of collapsing prices continues to remain on the agenda. First of all, the geopolitical confrontation between Saudi Arabia and Iran should be noted. They have never been considered friends, but at least within the framework of OPEC, the two countries were able to agree. Now the peak of the political struggle affects the oil market to a greater extent. As already noted, Iran is seeking to recover its market share, displacing primarily Saudi Arabia. But the Saudis are not going to give up their positions - the past two years have proved that the kingdom is ready for any price just to keep its market share. And the statements of the Saudi Aramco management about their intention to increase oil production to 12m barrels per day are not conducive to achieving a balance on the market.

Rising oil prices could once again return the producers of shale oil in the United States to the market. The representative of the International Energy Agency (IEA), Neil Atkinson, believes that the United States has "the key to restoring the balance of supply and demand".

According to IG analyst Angus Nicholson, the price of 45 dollars per barrel of WTI crude oil is able to return many producers of shale oil to the market and cause a new collapse in prices.

In the current conditions, there is no point in expecting OPEC to take artificial steps to support oil production. Chances are high that the summit of the cartel expected in June will be another meeting with no results. However, if certain rules of the game such as prevention of uncontrolled production growth and the ratio between the rate of oil production growth and the rate of growth in demand are observed, the market will be balanced before the end of 2016.

Thus, we can say that in two years the oil market showed its ability to regulate itself without artificial injections from the side. In fact, this means the full decline of the OPEC era that has dominated the oil market since the 1960s. And the main factor on the market is the balance between supply and demand. And the price formed on the basis of this balance may be the most stable and profitable for both producers and consumers. At least, the economic theory says so.