Syed Rashid Husain
IRAN is no more a deal breaker!
Saudi Arabia and its Gulf allies would go ahead with output freeze next month regardless of whether or not it can reach an agreement with Iran, an Arab OPEC delegate was quoted in the press as saying. “There is agreement from many countries to go along with a freeze,” said the delegate. “Why make it contingent on Iran?” A tacit understanding could be in the making.
Russian Energy Minister Alexander Novak has been, at least twice, to Tehran in recent weeks, apparently endeavoring to obtain Iran’s nod to some sort of arrangement with other oil producers on an output freeze regimen. Although publicly, Tehran has not yielded, yet, it is understandable that for Iran to disregard the Russian push on the issue could be difficult. In fact, after Novak’s recent visit, one could definitely see rumblings that the OPEC freeze arrangement could be on, despite Iran not being in the tent – at least for the time being.
Some 10 days earlier, the Wall Street Journal quoting an OPEC official, reported Saudi Arabia, Kuwait and their allies would limit their oil output even if Iran doesn’t follow suit. Though the Gulf Arab OPEC members still wanted Iran to put brakes on output, yet (they) no longer wanted their opposition to stand in the way of a deal.
The energy minister from the United Arab Emirates too admitted Thursday his country would participate in the April meeting in Doha. Qatari Oil Minister Mohammed Al-Sada also extended an invitation to Kuwait's oil minister to attend the April 17 moot. Apparently Kuwait would also join in.
OPEC Secretary General is on board too. While Iran is seeking to increase production with the lifting of international sanctions, the deal may be successful even without Tehran, Secretary General Abdalla Salem El-Badri insisted. "I hope the result of the (April 17) meeting will be positive. They (Iran) are not objecting to the meeting but they have some conditions for the production and maybe they will join the group in future,” he said at a conference in Vienna last Monday.
“The price is going up; I hope this trend will continue… I don't expect the price will go high but I think it will go to a moderate level," El-Badri added.
He though underlined it’s too early to discuss a production cut, as producers should deal first with the freeze. "Let us go to the freeze and see what will happen, then we will talk about any other steps in the future," El-Badri added. He however, cautioned, while inventories are about 300 million barrels above the five-year average, prices will come back to normal only when the glut gets reduced.
"It's a setback but it will not necessarily change the positive atmosphere that has already started," one OPEC source from a major producer was quoted in the press as saying.
The willingness of Iraq, the biggest source of OPEC supply growth in 2015, to join the deal is also important in helping the sentiment go positive. Baghdad last week said the freeze initiative was acceptable, citing the hardship for producers caused by low prices.
All this definitely marked a turnaround. Most OPEC stakeholders have been insisting all through - the deal was contingent on Iran taking part. No more, it seems.
Low oil prices have definitely contributed to the emerging scenario. It is definitely hurting every one. And every one is noticing that the crude markets have been reacting rather positively to the output freeze talks. Oil prices have rallied more than 20% since the Feb. 16 production-freeze pact announcement. Last week, the Qatari oil ministry terming the agreement as the “Doha initiative,” also credited it with the change in sentiments of the oil markets.
Indeed oil prices have gone up – just with the talk of freeze. And major stakeholders definitely do not want to send a negative signal to destabilize the markets – bringing it to knees – once again.
The Doha agreement is more symbolic in nature. Other factors could have impacted the turnaround. As per the IEA, output from 15 countries – minus Saudi Arabia – could decline in the coming months. The agency reports that the combined output of the group will drop by 200,000 barrels a day in 2016 because of investment cuts and lackluster demand.
Neil Atkinson, head of the oil market division at the International Energy Agency, is hence of the view that a deal among a few OPEC producers and Russia to freeze production was likely to be "meaningless" as Saudi Arabia was the only one with the ability to raise output.
Another factor pushing major stakeholders toward a freeze agreement was that despite all the public posturing by Tehran, about raising output to 4 million bpd, things have not been easy for Iran in this direction. Obstacles continue to hamper Iran’s oil exports.
Indeed, Iranian oil flows to Europe have begun to pick up from a slow start after sanctions were lifted in January, yet trading sources are saying that a lack of access to storage part - now looms large on a list of obstacles. With most US sanctions still in place, no dollar clearing yet, no established mechanism for non-dollar sales, most banks were still reluctant to provide letters of credit to facilitate trade.
A new initiative by international ship insurers though has helped, but traders say exports have also been hampered by Iran’s unwillingness to sweeten terms for potential European buyers.
According to OPEC’s figures, Iran’s crude production has risen only by 245,000 bpd over the past two months - half the increase the country pledged immediately after sanctions were lifted. And it was apparently in this perspective that a Kuwaiti oil official pointed out, that Iran’s oil return “has been smaller and slower” than expected.
But not everyone seems convinced about a market turnaround in real sense. The IEA monthly oil market report, released March 11, underlined a freeze on production will not have an immediate impact on the global oil market.
Others too seem to be agreeing. The recent march of US crude prices to $40 per barrel won't last, John Kilduff of Again Capital, said, predicting another $25 environment ahead. "It's certainly going to disappoint the markets," he told CNBC's “Worldwide Exchange,” reasoning that even with a freeze, the persistent glut and lack of a production cutback sets up oil prices to fall back to their February lows.
Courtesy, the output freeze talk, for the time being at least, crude markets seem in some sort of spin!
