Syed Rashid Husain
The initiative to generate a coordinated response to the plunging oil markets has made some headway – finally. Concerns have been making rounds – all around – for months now. There were no exceptions.
Low oil price was making budget-making difficult in most – if not all - oil capitals. Projects were getting stalled and payments were being delayed, as meeting public expenses had become an uphill task. And the most hit oil producers, the likes of Venezuela, were indeed desperate to have some sort of action to stabilize the oil markets.
Behind the scene deliberations were on. Yet, none were ready to give up the market share. The battle was on. And indeed there were reasons for that. Back in 1986, Riyadh was the sole swing producer of the world. It was producing only as much as the market needed – so as to keep the markets stabilized.
Thus the onus was on Saudi Arabia then to keep the markets stabilized – while ‘inefficient’ producers kept on benefiting from this stability – at a cost to Riyadh.
Consequent to this policy, Saudi market share dropped from more than 9 million bpd in 1981 to 3.175 million bpd in 1985. Ultimately Riyadh had to act – to protect its own interests to. It opened taps. The markets went berserk. Crude oil prices sank – from $31.72 in November 1985 to $10.42 in March 1986.
And it was in this background that Saudi Arabia has been insisting now, it would not be ready to take any unilateral steps and reduce output, unless all stake holders too acted in a coordinated manner.
Indeed Saudi Arabia had financial muscles to override the ensuing financial pain. Yet, the scenario was a free - for all situation, with crude markets taking one hit after the other – reaching a 12 year low a couple of weeks back. The scenario became unsustainable for some. Not everyone had the muscle to absorb the punches.
And it was in this perspective that the Venezuelan Energy Minister Eulogio Del Pino began shuttling – from Moscow to Riyadh and then Doha to Tehran. The mission impossible – as some initially called it – was to bring major stakeholders together and engineer a coordinated output cut. The objective was to stabilize the markets and prop up prices.
Earlier the month while he was in Riyadh, after the Moscow visit, the prospects of any movement on the issue appeared only dismal. Initially there was no cue of any breakthrough. The comments made after the meeting between Ministers Naimi and Del Pino lacked any mention of an agreement on strategy to move ahead. Other stakeholders too felt the same. “Nothing really happened at the meeting,” an OPEC delegate was quoted as saying by The Wall Street Journal.
Yet, it now seems, things did move ahead, at last somewhat.
Last Tuesday Saudi Arabia, Russia along with Venezuela and Qatar, announced the first joint agreement between OPEC and non-OPEC players in 15 years on coordinating their outputs. They opted to freeze production at January levels – provided indeed all other stakeholders too agree to the arrangement.
This may not be bringing about any major change immediately in the global glut, yet, it was definitely the first ‘real’ step in the desired direction.
And immediately after the Doha ministerial, the ministers from Venezuela, Qatar and Iraq dashed to Tehran to ascertain Iranian position on the issue, as Iran now held the key to any further progress on the initiative.
After spending two hours last Wednesday with the visiting oil ministers, Iranian Oil Minister Bijan Zanganeh yielded, his country could support efforts to stabilize oil prices, including cooperation between OPEC and non-OPEC oil producers.
Zanganeh emphasized that while he supported a production "ceiling" to stabilize oil prices, it's the first of several steps that should be taken. Sensing a positive hint in the statement, crude prices bounced slightly, with US oil popping above $30 per barrel and Brent futures nearing $34.
And later while talking to Iranian media, Zanganeh underlined, "we had a good meeting today and the report of yesterday’s meeting was given to us. I was told that Russia as the world’s biggest oil producer, Oman and other countries are ready to join. This is a positive step, we have a positive approach to it and this is a good start."
Yet the initial Iranian reaction to the possible request to freeze output at current levels was not encouraging. "Asking Iran to freeze its oil production level is illogical ... when Iran was under sanctions, some countries raised their output and they caused the drop in oil prices," Iran's OPEC envoy, Mehdi Asali, told the Shargh daily newspaper before the talks on Wednesday.
Iran exported around 2.5 million barrels per day (bpd) of crude before 2012, but sanctions cut that to around 1.1 million bpd. Freed from sanctions, Iran ramped up its production to nearly 3 million bpd in January, up 80,000 over December. Tehran has now pledged to raise supply by around 1 million bpd over the next 6-12 months.
The Venezuelan initiative to bring major stakeholders on a page, thus seems forging ahead – slowly but surely. The process is on. The deal to freeze production at January levels, which includes Qatar and Venezuela, is the “beginning of a process” that could require “other steps to stabilize and improve the market,” Saudi Oil Minister Ali Al-Naimi was quoted as saying in Doha after the agreement.
And in the meantime, Saudi Arabia has no intention of cutting output – unilaterally – Foreign Minister Adel Al-Jubeir underlined last Thursday.
And in the meantime, the process has crossed some political hurdles too. With Saudi Arabia and Russia standing on the opposite sides on the Syrian imbroglio, many felt a deal on oil markets may not be possible. Yet, signals emanating from Moscow are positive.
On Friday President Putin had a telephonic conversation with King Salman on Syria. This was a good omen for the crude markets too.
And the attitude in Kremlin on oil markets too seems positive. There is no link between Syria and oil production in Russia's dialogue with Saudi Arabia, Kremlin spokesman Dmitry Peskov said on Wednesday."They are two different matters," he told reporters.
"It is natural they have a dialogue about their own interests, both sides are naturally interested in such a dialogue. These are things that are not interdependent and not interlinked." He added Russia is interested in continued dialogue with other oil producing nations to exchange views on the situation on the global oil market.
Brute economic realities seem to be dictating terms – finally.
