Freeze pact proves elusive as Doha meeting highlights OPEC divisions

Nearly 12 hours of talks among major oil producers on Sunday collapsed with no agreement on a long-mooted output freeze, priming the market for a likely fall when it opens Monday and casting into doubt the viability of any diplomatic efforts to address the global supply overhang.

Despite initial optimism that a deal had been reached, with a draft agreement even leaked to the media early Sunday, as the day progressed it became clear that Iran's refusal to participate would prove too much of an obstacle.

Several countries insisted Iran be a party to any deal to freeze output to help balance the market, scuttling negotiations and illustrating the difficulty in aligning the diverse interests -- geopolitical, economic and budgetary -- of the oil producing world.

"The meeting concluded that we all need time for further consultation," said a subdued Qatari oil minister Mohammed al-Sada, who was left to address a news briefing alone on a five-seat stage after the meeting broke up.

He put a brave face on the proceedings, rejecting any suggestion of acrimony among the participants and saying that the meeting took so long because "there [were] many scenarios we looked at."

But Russian oil minister Alexander Novak, one of the leading architects of the freeze proposal, in a separate briefing expressed his disappointment and surprise that some countries appeared to suddenly reverse their positions on the freeze after an initial deal appeared in the bag.

However, he said, he would not rule out working with OPEC in the future, even with the divisions evident within the producer group that he blamed for the breakdown in talks.

"This morning a number of OPEC countries changed their position and demanded that all OPEC countries and large exporters outside OPEC joined the freeze," Novak said, despite a preliminary deal that exempted Iran. "It was unexpected to receive new conditions, [but] Russia is ready to look at the possibility of taking part in new meetings. The door is not closed."

EYES TURN TO OPEC MEETING

The failure to reach a decision in Doha means it would take a major change in market conditions for producers to develop a plan that could bridge their differences.

That next opportunity could come at OPEC's regularly scheduled meeting, set for June 2 in Vienna.

Sada said the Doha meeting participants, which comprised 18 countries, including 11 from OPEC and key exporter Russia, expressed willingness to reevaluate the market at that OPEC meeting and possibly convene again.

"It will depend on the consultations between ourselves and the situation in the market," Sada said. "When we feel we need to meet, then we have a full and open channel of communication."

For now, Sada said, oil market fundamentals are "improving," and prices are "heading in the right direction."

"How long [the market] will take to balance itself, we are yet to see," he said. "It is certainly in the right direction."

KUWAIT STRIKE IMPACT

NYMEX May crude settled at $40.36/b on Friday, while ICE June Brent settled at $43.10/b.

Analysts said they expect crude prices to drop when trading opens Monday morning, on the lack of a deal, given that prices had risen over the last few weeks in anticipation of a freeze pact. However, the impact could be somewhat blunted by reduced output from Kuwait due to an oil worker strike that began Sunday.

"The market is likely to sell off given the positioning and given the outcome was worse than expected," said Michael Cohen, head of energy commodities research at Barclays. "Some may see it as a buying opportunity after the Kuwait news, as well, is priced in."

Kuwait's state upstream operator said Sunday its oil production fell to just 1.1 million b/d, as oil sector workers began an open-ended strike over proposed changes to their pay and benefits.

Refinery output was also reduced to 520,000 b/d, down 44% from its full capacity of 930,000 b/d, Kuwait Petroleum Corp. said, though exports have not been affected.

Ehsan Ul-Haq, principal consultant at KBC, agreed that the Kuwait developments likely would keep prices from falling too far on news out of Doha.

While Brent prices may dip below $40/b in the next few days, he said he does not foresee any return to the sub-$30/b prices that the market saw in January, as declining US production and disruptions in Iraq, Nigeria and other countries, along with the Kuwait strike, help bolster prices.

"Probably the oil price might go down a bit, but on the whole, the market is not likely to react that negatively after a few days," Ul-Haq said. "The market will find some stability or even increase."

IRAN STUMBLING BLOCK

The Doha talks followed pressure from oil-dependent nations such as Venezuela, hit hard by nearly two years of low prices, and marked a new level of involvement by Russia in the affairs of OPEC.

But OPEC members Iran and Libya were absent from the meeting. Iranian oil minister Bijan Zanganeh said Saturday that Iran refused to "self-sanction" itself by limiting its own return to world markets.

Iran had made clear its determination to increase its output to about 4 million b/d, the level it had achieved before the imposition of international sanctions constrained its production beginning in 2012.

While Russia had advocated giving Iran the freedom to duck out of the deal, the willingness of OPEC's largest producer, Saudi Arabia, had been particularly in doubt.

Saudi Deputy Crown Prince Mohammed bin Salman had said in a Bloomberg interview on Saturday that Saudi Arabia would not agree to a freeze that did not include Iran, its main oil and geopolitical rival in the Middle East.

"The negative reaction from some countries about Iran's declaration, that is the problem," Ecuador's representative to the OPEC board of governors, Wilson Pastor Morris, said earlier Sunday, during a break in the negotiations. When the deliberations began in the morning, meeting participants were set to discuss a draft agreement that would have frozen production at January levels through October, while establishing a monitoring group composed of two OPEC and two non-OPEC countries.

But that draft agreement ultimately was scrapped and talks reportedly broke down over the Iran issue, as well as the wording of the agreement.

The original meeting agenda had the proceedings concluding by 10:30 am, but ministers remained in the meeting room until breaking around 11 am for a visit to the emir of Qatar, Sheikh Tamim bin Hamad al-Thani, and lunch. Negotiations resumed in the afternoon and slogged through dinner and into the evening, before the ministers finally gave up with no agreement.

Saudi oil minister Ali al-Naimi left the meeting venue, the Sheraton Doha without speaking to reporters.

Sada said Iran's inclusion in a freeze would have been helpful to "accelerate the rebalancing of the market."

But, he added, "We, of course, respect their position. ... It was a sovereign decision by Iran."

--Staff reports, newsdesk@platts.com

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