Syed Rashid Husain
The message from OPEC headquarters — near the iconic Vienna State Opera house — is now clear: We cannot and will not take up the responsibility of balancing the markets — single handedly. Others will have to join in and contribute to the effort. “The world dynamics have changed,” OPEC President Emmanuel Ibe Kachikwu said after the ministerial meeting. “We need to look to non-OPEC members to join us in this stability drive.”
Fireworks inside the meeting room were very much palpable. Expected to last four hours, it went on for almost seven. OPEC members demanding output cuts, such as Iran and Venezuela, were unwilling to offer production cuts themselves, while Saudi Arabia and the Gulf Arab states, remained insistent; others too need to come forward before a process could be initiated.
And thus the ceiling was rolled over. “Effectively, it’s ceilingless,” said Iranian Oil Minister Bijan Namdar Zanganeh. “We aren’t going to go back to a cartel and work against the customers — that time has passed,” prompted United Arab Emirates Minister Suhail Al Mazrouei. Most of the market “doesn’t have any ceiling,” Iraqi Oil Minister Adel Abdul Mahdi told reporters. “Americans don’t have any ceiling. Russians don’t have any ceiling. Why should OPEC have a ceiling?”
And yes — in the entire process — drama too was palpable — with many twists and turns!
Oil prices were lifted on Thursday, a day before the OPEC meeting, by the news that Saudi Arabia would propose a production cut if non-OPEC members, such as Russia, also adhere to the cut. Many took this as a sign of softening in Saudi stance. Energy Intelligence, the influential industry media reported, Saudi Arabia will call for a cut in output of 1 million bpd next year by OPEC states, but only if other members and non-members such as Russia, Mexico, Oman and Kazakhstan were prepared to commit to a coordinated effort. Within OPEC, the reported proposal suggested Iraq to freeze production levels at current volumes of about 4 million bpd, while Iran, which expects Western export sanctions to be lifted early next year, would also need to participate in the effort.
Although the report was widely circulated, yet, on a closer look, there were many ifs and buts to it. Indeed the proposal, if at all on the table, was not something new or out of blue. Saudi Arabia has been insisting from day one; it was ready to act in coordination with other OPEC and non-OPEC members. The position is widely known. Saudi Arabia and its allies could not and should not be expected to cut back their output, while others continue to play as usual. Even the Saudi Cabinet in its recent weekly meeting had underlined the desire and the determination of the Kingdom in balancing the markets in coordination with other producers.
The meeting day was no different. Saudi Arabia is willing to cooperate with anyone to re-balance the market, Minister for Petroleum and Mineral Resources Ali Naimi told reporters on Friday as ministers arrived at the OPEC headquarters to discuss its next move. The pressure isn’t solely on Saudi for output cuts, Naimi added.
Eyes were hence focused on two major players, Iran and Russia. Would they be ready to coordinate and participate in the efforts to stabilize the markets? The answer appeared a simple no — making the possibility of an output cut almost redundant.
“We do not accept any discussion about increases of Iran production after the lifting of sanctions. It is our right and anyone cannot limit us to do it. We will not accept anything in this regard,” Iranian Oil Minister Zangeneh told reporters in Vienna, prior to the ministerial meeting.
Iran, which plans to increase shipments once international sanctions over its nuclear program are lifted, said it’s only willing to discuss curbs on output after its production reaches 4 million bpd, more than 1 million above current levels. “And we do not expect our colleagues in OPEC to put pressure on us… It is not acceptable, it’s not fair,” Zangeneh said.
On the other hand, top non-OPEC producer Russia appeared unwilling to budge from its position. Russian Oil Minister Alexander Novak told local news agency RIA that he saw no need for Moscow to decrease oil production.
Any possibility of a coordinated output cut hinged, to a great extent, on some sort of understanding between Saudi Arabia and Russia. That was simply missing. The gaps between the two remained wide open. In the ongoing conflict in Syria, Riyadh and Moscow are on the opposite sides. On the issue of Iran too, the differences between the two is widely known. And the two countries are also contesting to grab a larger share in the Asian and now the European energy markets.
“If that (Syrian) conflict is continuing to fester, it’ll be almost impossible for the Russians and the Saudis to come up with an agreement on oil,” Amy Myers Jaffe, executive director of Energy and Sustainability at the University of California at Davis told the press.
In the meantime, an internal OPEC document warned the members that oil prices would remain under pressure in the near future while markets would remain oversupplied even if the group cut its output. Indeed OPEC was not ready for this.
The analysis, reviewed exclusively by The Wall Street Journal, underscores the conundrum faced by OPEC. The document, a transcript of a technocrat meeting last week, warns that “overall the current surplus, while easing, should continue to cap the upside in oil prices for the coming quarters.”
It underlines that, if current production remains unchanged at 31.5 million barrels a day, markets will still be oversupplied by 700,000 barrels a day in 2016 — though that would be less than the glut of 1.8 million bpd OPEC estimated for this year.
If OPEC scaled down its production to that level, markets would face a deficit of 800,000 barrels a day next year, the document reportedly said. Yet that “would not be sufficient to completely clear the current supply overhang,” because of the presence of large quantities of oil in storage, WSJ reported.
Inventory too is on rise. On Wednesday, the US Energy Information Administration said that commercial stores of crude rose by 1.2 million barrels to a total of 489.4 million barrels for the week ending Nov. 27. As per estimates compiled by Bloomberg, traders had forecast crude oil stocks would fall by 800,000 barrels. Oil inventories at the storage hub of Cushing, Oklahoma, where the benchmark US futures contract is delivered, also ticked up by 400,000 to 59 million barrels.
But the euphoria, generated by the Energy Intelligence report, began subsiding within hours. Prior to the commencement of the meeting on Friday, Naimi said “It is baseless that there is a Saudi-coordinated proposal to cut output.”
And that was the proverbial last nail. In the absence of any overtures by other producers, any such proposal was simply not on the table — one could now safely deduce.