Output freeze likely at Doha but fundamental impact limited, says Morgan Stanley

The most likely outcome of the oil producer meeting in Doha on Sunday is a production freeze, with the focus on the terms of the deal, which ultimately is unlikely to impact fundamentals, Morgan Stanley said.

The bank noted Saudi Arabia has publicly argued there is little reason to cut production. The greater focus is on Iran and the risk the return of Iranian volumes presents to the oil market.

“The only question is whether an agreement will hold without Iran participating. Headlines have been conflicting on this front, but the latest ‘leak’ is that Saudi Arabia and Russia have agreed on a freeze, even if Iran doesn't participate.”

The bank said that while consensus is right to be dismissive of the impact of a freeze, prices will still react to headlines and the rising probability of a deal.

“The market may be too complacent about bullish headline risk at the Doha meeting, even though the fundamental impact is likely limited.”

It pointed out that news headlines have helped lift the market, but scepticism about the freeze and a lack of details have kept investors bearish.

As a result, even though the potential for an agreement is known, official confirmation of a deal with more details can continue to support prices.

MS said this was particularly true in an oversupplied market where prices have been dominated by technicals, macro and positioning.

“A deal not only seems likely - as leaks and prior announcements have suggested - but confirmation of the deal, greater clarity about the freeze or hints of further OPEC action could reinforce the bullish sentiment.”

Still, any upside should be limited at current price levels by producer hedging.

According to MS, the bull case would involve Iran agreeing to a cap and OPEC committing to more action in June.

In a bear case scenario, the odds of which it reckoned were low, the deal would fall apart but there would still be positive spin and a commitment to continue talks.

MS said the commentary and details of the agreement would likely be the main points since the deal is broadly expected.

Key issues include: the question of who is participating; how Iran will be treated; what level production is capped at and the timing of the implementation; which production data source will be used for caps and verification; how the agreement will be enforced; and whether the caps will be monthly or annual.

“Like consensus, we don't see a cap at record production as overly helpful for the supply-demand balance. Excluding the country with the most growth potential, Iran, does little to change the state of the market, and the market is already oversupplied at January production levels.

“That said, we do think commentary about a freeze can be effective in terms of sentiment and positioning, something we have already seen year-to-date. he risk is on the degree of follow through and headlines after the meeting.”

At 0930 BST, West Texas Intermediate was down 1.6% to $41.49 a barrel and Brent crude was off 1% at $44.24.