For all the euphoria about the proposed OPEC oil production freeze deal, the reality is that nothing has been actually decided. As readers will recall, the only "decisions" agreed to between the Saudi and Russian oil ministers were to cap production at already record high levels of output, however contingent on everyone else voluntarily joining said production cap.
Then yesterday, as part of its own meeting, Iran made it clear that while it supports efforts to push the price of oil higher, it would certainly not limit its output at current levels, and instead requires an explicit loophole granting it a production limit from the pre-sanctions period. This put OPEC in a bind: if it grants Iran special treatment, then who else will have a similar request.
The answer was revealed just hours later when Iraq earlier today stopped short of saying it would curb production of oil to prop up sagging prices, saying negotiations are still ongoing between members of the Organization of the Petroleum Exporting Countries.
According to the WSJ, Iraq oil minister Adel Abdul Mahdi said his country supports any decision that will serve producers, prop up prices and achieve balance in the crude markets. However, just like Iran he didn’t explicitly say whether Iraq would curb its own output but said any rapprochement between all sides to restrict crude output is a step in the right direction.
As the WSJ summarizes, his comments "came a day after Iran’s oil minister didn’t commit to limiting production, throwing into question the future of a plan brokered by Saudi Arabia and Russia this week for major oil producing countries to limit their output to last month’s levels."
“The deterioration of the oil prices has directly impacted the global economy and the historical responsibly of the producers requires great speed in finding positive solutions that will help prices return to the normal [levels],” Mr. Abdul Mahdi said in a statement.
In other words, more of the same, or as we summarized it with a brief tweet one week ago:
Everyone wants higher oil prices; nobody wants to cut production— zerohedge (@zerohedge) February 11, 2016
Only it's even worse, because while OPEC may have the luxury of cutting, even if its members do the unthinkable and decide to trust each other to comply (which they won't), they still have to contend with the distressed US shale sector, which courtesy of several hundred billion in debt, has no such luxury, and must keep pumping just to repay the interest and maturities on its debt or face a wave of mass defaults, one which according to Deloitte could bankrupt as much as a third of the oil space.
And then, what's worst for OPEC, is that even in bankruptcy (and after) US producers will still keep pumping especially with a debt-free balance sheet where the all-in production costs tumble; the same is true in the case of distressed M&A because any acquiror will i) have a far stronger balance sheet and ii) a motive to keep generating cash even if it means a modest loss; because shutting down production completely means foregoing on billions in revenue (regardless of margin) while mothballing costs are so prohibitive that most would rather just keep producing in hopes that "someone else" will cut production first.
The only problem is that no one else will be the first to cut.
For now, the market has ignored the nuances and is hoping that just the tentative indications of an OPEC deal are enough, pushing oil to the highest level in weeks. We don't expect these prices to hold.