Monday saw oil prices drop by 3% on global markets after Iran delayed its plans to agree to a proposed production freeze.
The Iranian oil minister, Bijan Zanganeh, stated that Iran would not be participating in the production freeze until the country reached its target output of four million barrels a day.
This announcement saw a week’s worth of gains in oil prices wiped out as the markets prepared themselves for a continued increase in the global oil glut.
Back in February, a deal was made between Russia, Saudi Arabia and other Opec nations to stop production increases beyond the levels reached in January.
However, in their most recent statement, Iran made it clear that they intend to increase their production levels until they are in line with the output that was achieved before the implementation of global economic sanctions.
Over the weekend, Mr Zanganeh, said:
“I have already announced my view regarding the oil freeze and I’m saying now that as long as we have not reached four million in production, they should leave us alone.
“When we reach this level of production, we can then co-operate with them.”
According to Opec’s most recent monthly report, which was released on Monday, Iran hit production levels of just 3.1 million barrels per day in February. This output represented an increase of 187,000 barrels per day in January.
This means that Iran will have to increase its total oil production by around one-third before it agrees to enter into negotiations. The decision means that global markets are now facing the possibility of around 1 million more barrels per day entering the market, at a time when the level of supply was finally beginning to decrease.
This move could also jeopardise the existing agreement between Opec members because many of nations taking part had stated that they would only stick to the deal if Iran also froze production. The countries are due to meet in Russia on the 20th of March, to discuss this issue further.
The Energy Management Institute, a research consultancy, said:
“Without Iran participating and freezing their production, other producers may balk at the idea of making room for Iran or essentially giving up market share to Iran while they sit on the sidelines.”
Many nations that are members of Opec (Organisation of the Petroleum Exporting Countries) are already showing little sign of slowing their output.
This announcement from Iran comes as a time when many had been speculating about the country’s ability to sell any of its vast oil reserves. Last week the International Energy Institute said that nearly 72 million barrels worth of Iran’s oil is being stored on water. This represents a higher surplus than that which was seen before the sanctions were lifted in January.
Oil prices have plummeted in recent times, falling by almost 70% since they reached $115 per barrel back in June 2014. A lot of this can be put down to a slowdown in demand from China and other industrial nations, coupled with a significant increase in shale output in the United States.
In spite of this, the Opec nations have decided against making any significant reductions in oil production.
Opec’s report revealed that production dropped slightly in February, falling by 175,000 barrels per day to a new rate of 32.38 million. This came about mainly due to lower output from Nigeria, Iraq and the United Arab Emirates.
It has also lowered its forecast for demand in 2016. The report now predicts that total demand will reach 31.5 million barrels per day this year, this is 100,000 barrels lower than it had previously estimated. This does however represent an increase of 1.8 million barrels on the total demand seen last year.
The head commodities analyst SEB Markets, Bjarne Schieldrop, believes that this surplus of around 2 million barrels per day will continue to lower prices in the near future.
“We are likely to see $35 a barrel before we see $45 a barrel.”
Alexander Novak, Russia’s energy minister, met with Mr Zanganeh on Monday and has been quoted saying:
“Major oil producers shall co-ordinate with each other.
“However, since Iran’s production decreased under sanctions, we totally understand Iran’s position to increase production and revive its share in the global markets.”
Recent times have seen many market commentators begin to speculate about whether or not we have finally seen oil prices bottom out. However, there now those who believe that a failure to implement an effective production freeze could lead to prices falling even further.
PVM brokerage believe that the process of creating a floor for oil prices is unravelling quickly and that the markets could be set for a sharp fall in the near future.
An analyst at Emirates NBD, Edward Bell, said:
“What we’re seeing is a reaction to how much we have rallied, which is a 17% increase to the Brent price in a month.”
Mr Bell went on to explain that the continued fall in the number of U.S. rigs for the twelfth consecutive week, will not be enough to boost oil prices again. He said that the reason for this is the fact that the drop in rig count will not necessarily equate to a fall in production. The U.S. have also become more efficient when producing oil, which means that they have managed to keep production at a rate of 9 million barrels per day.
Another effect of a prolonged price decline could be that U.S. shale producers stop deconstructing their rigs. The reason for this is that they may want to prepare themselves for a time when prices begin to rise again. If this is the case, it means that any chances of a price recovery could be harmed in the future as shale rigs are brought back into action, just as demand begins to increase.