Ever since the Organisation of Petroleum Exporting Countries’ (OPEC) de facto leader Saudi Arabia (along with fellow members Qatar and Venezuela) in February agreed with non-OPEC member Russia to temporarily freeze output to address the global oversupply situation, there was hope that more parties would follow the two largest oil producing countries in the world to reduce production.
Encouraged by this positive development, Qatar volunteered to provide a common ground where all the cartel’s members could have a rare meeting with those from outside, on April 17, to agree to hold, if not reduce, crude output at January, 2016 levels.
A handful of optimists believed countries participating in the meeting, having realised how their suicidal battle for market share was wreaking havoc on oil prices and subsequently their oil-dependent economies, would surely agree to maintain production at realistic levels to help rapidly push oil prices upward. The overwhelming majority of cynics, however, stood firm in stating that such a ‘freeze deal’ would never see the light of day, especially with Iran – which had been recently freed from the shackles of Western sanctions – issuing near-daily rhetoric to boost production by half a million barrels per day and soon achieving pre-sanction output levels of about 4.2mn barrels per day (bpd).
The days leading to the parley was marked by uncertainty and pessimism, with the Islamic Republic rejecting all logical appeals to curtail its oil production, and Saudi Arabia insisting it would only agree to hold output if Iran promised to do so and affirmed its stand that Tehran must be a party to any freeze agreement. Come April 17, the majority’s prediction prevailed.
Iran, which many felt would at least send a representative, if not the Oil Minister Bijan Zangeneh himself, remained absent from the talks. With no Iranian delegate present, oil ministers from the 18 participating OPEC and non-OPEC nations (particularly Saudi Arabia and Russia) fiercely debated the wording of a communiqué, and after a five hour-long meeting, announced that no deal had been reached. Mohammed Saleh Al Sada, the host nation’s Energy Minister said, “We concluded that we all need time to consult further.”
As soon as word was out that the talks had failed, prices of global benchmark Brent crude – which had been rallying ahead on the back of hopes for a successful freeze pact in Doha – tumbled by as much as 7% to settle at around $40 a barrel for the day, although further fall was prevented by the simultaneous oil workers strike in Kuwait, which more than halved the country’s daily output.
“There was never much substance to the 50% rally in oil prices in recent weeks – and now the Doha fiasco has confirmed the point,” Paul Hodges, ICIS special advisor and chairman of International eChem, told Oil & Gas Middle East.
“Saudi Arabia made it very clear that it was not prepared to cut production, as experience taught it that this would simply allow other producers to monetise their oil at Saudi’s expense.”
The blame game begins
The mud-slinging between the swing oil producers began as soon as delegates emerged out of the closed-door meeting in Doha. While Saudi Arabia squarely put the blame on Iran as the sole reason for a ‘no-deal’, officials in Tehran were not late to take a jibe at Riyadh. Iran’s official Shana news agency quoted the country’s OPEC representative as saying that, “Those who suggested an oil output freeze wrongly thought that Iran had no option but to accept.” The Islamic Republic was also backed by key ally Russia, whose Energy Minister Alexander Novak termed the surprise Saudi demand in Doha for all countries to participate in a production freeze as ‘unreasonable’.
Analysts believe Saudi Arabia’s oil policy is no longer being shaped by its 80-year-old Oil Minister Ali Al-Naimi, but by the young and dynamic son of King Salman Bin Abdulaziz – Deputy Crown Prince Mohammed Bin Salman, who as Defence Minister is consolidating his influence over the Kingdom’s diplomatic, political and economic affairs. In a recent interview with Bloomberg, Deputy Crown Prince Mohammed – in a departure from the initial freeze agreement in January with Russia – categorically mentioned that Saudi Arabia would only slow down oil production if Iran committed to do so — a stance which experts believe the Kingdom’s ageing oil minister merely echoed at the Doha meeting.
Venezuela’s Oil Minister Eulogio Del Pino too named Saudi Arabia as being behind the failure of the talks, saying that he was under the impression that the Saudi delegation, led by al-Naimi, ‘had no authority to decide on anything” as they were under strict instructions from Riyadh, in apparent reference to Mohammed Bin Salman’s growing clout on the oil policy. The Latin American OPEC member however also offered its own version of the collapse of the meeting, with Del Pino citing ‘intense pressure’ from the United States as being one of the reasons why OPEC and non-OPEC producers failed to reach a deal.
“The United States was behind the pressure. They have a problem with Venezuela, Russia… They are doing this for political reasons and are ignoring their own people suffering. Ask any oil company in the US — they are all very sad because of what happened [in Doha],” he said.
A blow to OPEC’s credibility?
Experts believe the Doha debacle was more a result of diplomatic bickering than economic difference of opinions.
“OPEC has become the battleground for political tensions between Riyadh and Tehran, acknowledging that the Doha meeting was no official OPEC meeting,” Norbert Ruecker, head of commodities research at Swiss private banking firm Julius Baer, told this magazine. “Most market observers have been very cautious on the outcome in the run-up to Doha, but the failure and the inability to come up with any agreement was nevertheless astonishing. From a pragmatic stand point it makes sense for Iran not to accept a freeze, when it’s ramping up output after sanctions have been lifted. Similarly, it makes sense for Saudi Arabia to see a deal without Iran as lacking its teeth.”
“The message send with the talks failure,” Ruecker says is “that OPEC is unable to agree on a supply deal, is nevertheless bad news for the organisation’s credibility.”
As a fallout of the botched up meeting, the two largest oil producers, which were expected to prove instrumental in drafting a freeze agreement, threatened to ramp up production to defend market share. Just days after the Doha flop show, Saudi Arabia said it could jack up output instead to defend its position as the world’s largest oil exporter — by as much as 2mn bpd to over 12mn bpd — which would also help it beat Russia as the world’s largest producer. Russia soon retaliated by stating it was prepared to push oil production to historic highs, and Energy Minister Novak telling the local media, “They (Saudis) have the ability to raise output significantly. But so do we.”
He said Russia was ‘in theory’ able to raise production to 12mn or even 13mn bpd from the current record levels of close to 11mn bpd.
“We [at Julius Baer] have long argued that OPEC is a broken cartel that influences prices by market psychology rather than supply action.
“Thus, from our perspective, OPEC was never really able to influence prices longer term but only temporarily by driving market sentiment. Instead it was primarily Saudi Arabia and its closest allies which at times acted as the oil market’s central bank,” Ruecker says.
Building on his argument, he added: “From that perspective, Doha’s failure is a blow to OPEC’s relevance, which so far primarily relayed on its credibility to conduct oil policy. And if it wasn’t for the Kuwait oil strike, oil prices would likely have tumbled further. On the other han-d, Saudi Arabia looks less likely to act as altruistic oil central bank going forward, cutting supplies and forgoing oil revenues at the expense of others, when Iran is growing supplies.”
More attempts to be made
Certain participating nations have demonstrated maturity and made efforts to contain the negative consequences of the Doha fiasco. OPEC member Iraq has gone one step ahead of the other players by proposing another meeting of the world’s major oil producers in May in Russia, as an urgent measure to address the oversupply situation.
“Iraq will take part in this [planned] meeting. Iraq’s view is to have a freeze in output for a short period to help protect the interests of both producers and consumers equally by easing the surplus from the market and improving prices,” Iraq’s Deputy Oil Minister Fayyad Al-Nima has said, although Russia’s Novak has been quick to quash the idea saying there is a lack of willingness among the squabbling oil producers to meet again May.
Oman, the biggest non-OPEC oil exporter in the Gulf, on the other hand has offered to narrow differences between Saudi Arabia and Iran. The Sultanate’s Oil and Gas Minister Mohammed Bin Hamad Al Rumhy has emphasised that producers should still work on reaching a deal, while volunteering to facilitate discussions.
“Oman has a good relationship, by the way, with everyone, not just the Saudis and Iran, and we are prepared to see what is good for all of us,” Ruhmy said. One suggestion to advance the talks that wasn’t considered at the Doha meeting is to set the cap based on maximum production, he said.
“The reality is in the fields. Most of us have peaked, with the exception of maybe one or two, so if we say look, everybody is producing at a maximum level, let’s try to agree on where we are now and then move forward,” the Omani minister stated.
Producers should try to form consensus on a freeze by the time OPEC meets on June 2 at its headquarters in Vienna, Rumhy said. “Hopefully those who were not on board in Doha will be on board by June. From now on until June, we would be working on trying to convince everyone else that the freeze is the right way to do it.”
Hopes for fresh talks between OPEC members and non-members at the cartel’s planned meeting in June to achieve a viable production freeze have been renewed after OPEC Secretary General Abdallah el-Badri said imposing limits on oil producers could be on the table again. Nigeria, which has been yearning to lead the bloc and has even nominated a seasoned energy professional to succeed el-Badri as secretary general, has also called on fellow OPEC members to find a consensus on an output freeze.
“We are just going to work on it,” Nigeria’s Oil Minister Emmanuel Ibe Kachikwu said in a recent statement issued by his ministry.
“It is a supply and demand issue and we need to consult and bring everybody into the circle and thank God that a committee is now in place to try and work towards getting everybody on board,” he said. Observers however believe that the differences which caused the breakdown of talks in Doha are expected to prevail at OPEC’s planned meeting in June, or even if another unofficial get-together of the parties concerned were to happen before that. Russia’s Novak has stated that he will join a new round of talks on oil production freeze only if Moscow received guarantees from OPEC that its member countries have reached an agreement on the issue within the bloc.
“OPEC countries must first agree with each other, and if they say they have made a deal and invite the non-OPEC countries to join this deal, we will consider the proposal and take part in it,” Novak said in a recent interview for a local radio station. “In other words, we need guarantees that these agreements have been reached before taking part in consultations,” he said.
Experts say an output freeze deal, at least in the short term seems like a far-fetched probability, despite the optimism generated by a few OPEC and non-OPEC nations.
“Iran looks unlikely to agree to any OPEC deal to cut or freeze output, especially as it only returned to global oil markets in January, when international sanctions were lifted. Diplomatic tensions between Saudi and Iran may also scupper any potential OPEC agreement at least in the near term,” Muhamad Fadhil, regional manager at ICIS MENA, told Oil & Gas Middle East.
“Due to the low oil price environment, Saudi is tapping on its vast foreign exchange rates to make up for the shortfall in oil receipts. The future of oil prices still remains unclear and the lack of consensus among OPEC members is making market players jittery,” he concluded.
