Deal seen in Algiers despite some setbacks

Deal seen in Algiers despite some setbacks

August 28, 2016
Energy Outlook
Energy Outlook

Syed Rashid Husain

Is an agreement finally round the corner? Is OPEC heading towards an output freeze arrangement? Markets are looking for cues, awaiting the official OPEC response to the output freeze initiative.

And though the comments of Energy Minister Khalid Al-Falih late on Thursday, underlining that rather than making physical intervention, the fundamentals of demand and supply needed to be allowed to take care of the oil markets, did dampen some enthusiasm, yet, the overall sentiments today seem much more positive than at the beginning of the month. Markets seem hopeful; OPEC would act. In sharp contrast to the post Doha scenario, an output deal now seems a possibility. Realities today are significantly different than during the April OPEC ministerial.

The very talk of a meeting of stakeholders to discuss the crude market scenario and evolve a joint response, has seen the crude markets rally. Prices have gone up by almost 20 percent from the low 40s, registered at the beginning of the month. Indeed there are reasons, for the positive response of the markets to the output freeze talks and the resultant optimism in the air.

From day one, when the very idea of output freeze was floated, earlier this year, Iran has been crucial to a deal amongst the producers. And last April, when Riyadh decided to opt out of the agreement, it was solely because Iran was not ready to commit to any output freeze arrangement - until it achieved pre-sanction production levels. Saudi position was clear - then and now - it would only commit to any such arrangement, provided all stakeholders, Iran included, also agree to contribute. Iran was not ready, then!

Now for the first time, signals emanating from Tehran, appear somewhat positive. There are now indications that Iran might join the talks, to be held on the sidelines of the International Energy Forum from September 26 to 28 in Algeria.
As per a Reuters report, citing sources from within OPEC, Iran has indicated it may support joint action to prop up the oil markets. Some hence feel Tehran is now more willing to reach an understanding on the output freeze issue with other oil producers.

Behind the scene diplomacy has definitely helped encourage Tehran to align itself with the initiative. In order to rally support for an output freeze deal, Venezuelan Oil Minister Eulogio Del Pino toured oil-producing countries including Saudi Arabia and Iran.

The change in Iranian position, if at all, could be cited to one major fact. "Iran is reaching its pre-sanctions production level soon and after that it can cooperate with the others," a source familiar with Iranian thinking after del Pino's visit to Tehran told Reuters.

"In general, Iran prefers more actions from the OPEC side rather than just freezing at the maximum production level of all members. If this freezing issue helps prices to improve, Iran by positive words of support, will help," del Pino emphasized. This was a major announcement, giving markets the cue that an agreement may finally be on the horizon.

Simple arithmetic is also contributing to the possibility of an agreement among the producers. Already the OPEC battle to regain market share has yielded the desired, positive, results. In 2014, when OPEC opted to go for the global market share battle, it was in a different perspective. OPEC's market share had reportedly fallen then from 32.7% to 32.3% whereas, the share of Saudi Arabia in the global oil production had fallen from 10.6% to 10%.
That stand altered now, recent figures confirm.

The Saudi share in the world oil production has risen to almost 11% over the past two years. Saudi daily output has hit record levels in July, touching 10.7 million barrels a day and the current market buzz says it could even surpass that in August.

As per Bloomberg. Saudi Arabia raised its combined crude oil and refined-product exports to 8.83 million barrels a day in June, the highest on record for that month and the latest sign of the expansion of the kingdom’s share of global markets.

Saudi crude and refined products exports were 450,000 barrels a day higher in June than in the same month of 2015 and up more than 1.1 million barrels a day from June 2014. Over the same period, Iran and Iraq have also boosted exports.

Saudi Arabia’s crude oil exports in the first six months of 2016 also averaged 7.52 million barrels a day, compared with 7.46 million barrels a day in the same period last year, JODI data show. Production for the period climbed to an average 10.29 million barrels a day from 10.14 million barrels a day. The extra Saudi output in June was beyond the volume needed to cover the seasonal summer increase in domestic crude consumption.

Other OPEC nations are also producing at close to capacity. Iran is closing in on the pre-sanctions level. And in the meantime, Iraq is also reportedly asking energy companies to pump more, ahead of the September meeting, says Edward Morse, head of global commodities research at Citigroup. Iraq also plans to increase exports from Kirkuk by 150,000 barrels per day and a Nigerian militant group, which has been disrupting production in the Niger Delta, has said it was ready for a ceasefire and dialogue with the government.

Another interesting fall out of the current market glut has been a drop in the US shale output. This US shale revolution has been a major variable in the global energy equation over the recent years, bringing about a change in global energy dynamics. The shale development carried geo-political consequences too. However, as crude prices began going down, the number of rigs operating in the US too began falling - at least until recently. Consequently, the US crude production has begun going down, and, is projected to go down even further.

In the meantime, non-OPEC Russia has also increased its output. In the "Oil and Gas Extraction and Refining: Trends and Forecasts, January-June 2016 Results" bulletin, experts noted that in the first half of the year the Russian oil industry output reached 272.4 million tons (3.1 percent increase year-on-year) making it a post-Soviet record. Russian energy experts now believe that although the growth rate could diminish in the second half of the year, total oil production in 2016 will increase by some 6-7 million tons, or 1.5-1.6 percent year-on-year to a new record value of 539-540 million tons.

With high output levels and markets share of ‘low cost, efficient producers’ consolidated, major stakeholders do not appear losing out much on the output freeze agreement. Hence the possibility of an agreement in Algiers, despite some setbacks here and there, goes considerably up - many are beginning to assert now. And they have a point. Let’s wait and see!


August 28, 2016
HIGHLIGHTS