Determined OPEC regains dominance

Although hopes of an oil production-freeze deal were dashed again at OPEC's 169th general meeting in Vienna last month, the cartel's members were enthused by the fact that their strategy of defending market share was yielding results.

OPEC’s 169th general meeting in Vienna saw the election of a new secretary-general.
OPEC’s 169th general meeting in Vienna saw the election of a new secretary-general.

After the fiasco at the OPEC-Russia talks in Doha in April, most observers presumed that it was a bit too soon to hope for a substantial agreement to be reached at the cartel’s scheduled meeting on 2 June. Prevailing factors such as Saudi Arabia’s bid to maintain its grip as the de facto leader of the Organization of Petroleum Exporting Countries, and Iran’s resolve to regain its pre-sanctions oil output and export levels in particular, meant that member nations – gathered at the group’s headquarters in Vienna – would be unable to strike an oil production-freeze deal.

And so the meeting’s outcome was hardly surprising. OPEC member states’ oil ministers and representatives appeared to be at odds over what the bloc’s next move must be. The meeting did discuss a proposal by Saudi Arabia to implement an OPEC-wide production quota range, aimed at addressing the global oversupply situation – for which the cartel has been primarily blamed – resulting in the free fall of crude oil prices. The proposal, floated by Saudi Arabia’s new Energy Minister, Khalid Al-Falih, would have attempted to limit OPEC oil output to a range of 31.8mn to 32.5mn barrels per day (bpd), down from the current production of 32.77mn bpd. OPEC members failed to agree on that proposal.

While some, such as Kuwait and Qatar, appeared to support Saudi Arabia’s line – agreeing on the need for an output ceiling – others, such as Venezuela and Algeria, seemed to agree with Iran, which said an output ceiling must be accompanied by a country-specific quota system. Other oil ministers, such as Nigeria’s, called for open-minded discussion and unity – something that members have been left wanting at previous meetings.

However, in spite of the disagreements, OPEC’s June conclave was in no way a repeat of the bitter wrangling that took place at the group’s April meeting with Russia. There was relative peace, despite the differences in outlook, leading analysts and experts to term the meeting as “positive”. Silencing critics who had been loudly proclaiming since the Doha meeting that the 56-year-old bloc was “fractured and dying”, member nations unanimously elected a new secretary-general after two and a half years – Nigeria’s Mohammed Barkindo, who will take over from Abdalla Salem El-Badri for three years starting August 1 – in an apparent show of strength and unity.

Most importantly, OPEC seemed to convey the crucial message that the strategy it had adopted since late 2014, to allow members to keep pumping hard to defend global market share and eventually drive out high-cost, non-OPEC oil producers, was clearly working. Brent crude, the global benchmark, has been consistently trading around the $50 mark for the past two months or so – a remarkable recovery since plunging to a low of $25 in April.

“OPEC’s policy is working fine and has led to the organisation maintaining its market share and driving markets towards stability and a smaller supply-demand gap,” Suhail Mohamed Al Mazrouei, the UAE’s Energy Minister said after the meeting.

In its post-meeting statement, OPEC said: “Having reviewed the oil market outlook for 2016, the conference observed that non-OPEC supply, in response to market dynamics, peaked during 2015 and started declining, with supply expected to further decline by 740,000 bpd in 2016. Today, crude oil [production] alone is lower by more than 1mn bpd from its peak at the beginning of 2015. Global demand is anticipated to expand by 1.2mn bpd after growing at 1.5mn bpd during 2015. This demand growth remains relatively healthy considering recent economic challenges and developments.”

In a joint comment, Evelina Pagkalou and Andres Nolan, senior analysts at McKinsey Energy Insights, told this magazine: “Given the constraints inside OPEC in achieving co-ordinated action, an increase in oil prices will most probably come from a rebalancing of non-OPEC supply and demand. The underlying growth in demand for 2016 is expected to reach 1mn to 1.2mn bpd, and non-OPEC production is expected to decline by 1.1mn to 1.2mn bpd.”

“McKinsey Energy Insights expects the market to balance on a fundamental level in early 2017. Forecasts by both OPEC and IEA support this picture, with the timing of the rebalancing varying by a few months,” they added.

In comparison, OPEC’s crude output decreased slightly, by 0.1mn bpd, to average 32.36mn bpd. As a result, preliminary data indicates that the global oil supply decreased by 0.73mn bpd in May to average 94.51mn bpd. OPEC also boosted exports by 1.7% in May, to 23.6mn bpd, maintaining its share of global markets, as Iraq increased output and Saudi Arabia pressed ahead with a policy to squeeze rivals.

Iran back at the table

Much of the relative success of the Vienna talks can be accredited to the participation of Iran, which had abstained from the failed April talks, insisting it had a right to hike oil production to regain export revenues, especially after years of crippling sanctions. The Islamic Republic has looked to reclaim market share since nuclear sanctions were lifted in mid-January, with Oil Minister, Bijan Zanganeh, stating that output is currently at 3.82mn bpd. He predicts Tehran will have around 5-6% of spare production capacity after reaching 4mn bpd by the end of the year.

Zangeneh echoed the sentiment that the outcome in Vienna was the best possible result, and hoped the recent trend of marginal improvements in prices continues, especially “as the gap between supply and demand is shrinking”. He also believed it was a particularly good meeting for Iran, saying, “I think all [OPEC members] accepted [that] they cannot put pressure on others to change their ideas. And they accepted this reality in the market, and accepted the return of Iran to the market.”

Zanganeh said that OPEC members should be more conservative about the level of production so as not to destabilise the market. “I believe all member countries are going to be more realistic,” he added. “It means everything to all producers to stabilise the situation.”

Saudi Arabia’s charm offensive

A significant development that came to the fore during OPEC’s Vienna meeting was how Saudi Arabia – with a new energy minister at the helm being directed by the ambitious Deputy Crown Prince Mohammed bin Salman – was seeking to lead the cartel into becoming the one that dominates the world’s oil production and supply.

Intense diplomacy by the soft-spoken Falih at his first OPEC meeting – with his speech peppered by phrases such as “gentle approach”, “no shocks” and “consensus” – even persuaded Vagit Alekperov, the billionaire chief executive of Russian energy giant Lukoil and a harsh OPEC critic, that the bloc is more alive than dead. “The fact that OPEC agreed on its new management shows they want to regain their co-ordinating role. The cartel will perform market management again,” Alekperov, said following a separate meeting with Falih and Iran’s Zanganeh in Vienna.

Falih, who in April succeeded veteran Ali Al-Naimi, was the first OPEC minister to arrive in Vienna. He met most of his colleagues on the sidelines, spent several hours with independent OPEC analysts, and held a long news conference with reporters. “If you want to call [OPEC] a talking shop, I have no problem with that. But I think it’s going to do a lot more than talking. We are going to do co-ordination and co-operation [...] to achieve market objectives,” Falih said.

Falih acknowledged that Riyadh realised it needs OPEC, after the debacle at the Doha talks, where the kingdom’s then oil minister, Naimi, as per the directives of Prince Mohammed, insisted it would not agree to an output freeze deal without Iran at the table, jeopardising the future of the oil group.

“The markets can ultimately balance themselves but, as we have seen, when we rely on markets alone it is extremely painful for everybody,” Falih said. “I think managing in the traditional way that we have tried in the past may never come again. We will not go with setting a price target for OPEC. But [we should be] co-ordinating strategies and trying to understand what each of us can and cannot do.”

Despite the optimism generated at the Vienna meeting, tensions between OPEC member states – which began in November 2014 – remain. Back then, Saudi Arabia-coerced OPEC into deciding to keep on pumping oil at record levels, despite a drop in global oil prices. OPEC had an official production ceiling of 30mn bpd, but the target was effectively abandoned in December, allowing members to pump freely and adding to a global glut of oil.

The decision was seen as a strategy, led by Saudi Arabia, to retain market share in the face of rival non-OPEC producers. However, it has hurt the group’s poorer members, the so-called ‘fragile five’ – Venezuela, Nigeria, Libya, Algeria and Iraq – which have pleaded before for an OPEC output cut, to no avail.

Oil prices have since started to recover as non-OPEC supply comes off the market. Whether OPEC has succeeded in rebuilding itself as a united organisation in this meeting remains to be seen, however.

“Although OPEC failed to reach an agreement on production levels, we expect the market to rebalance on its own, without intervention,” an optimistic Antoine Rostand, senior advisor from AT Kearney’s Global Energy Practice, told Oil & Gas Middle East. “Current market forces continue to lead to a reduction of supply from both shale and high-cost non-OPEC fields, and places the oil production of several OPEC countries — such as Nigeria, Libya, and Venezuela — under pressure. Even production increases in fast-growing OPEC countries are running out of steam. All of these signs are indications that the market will rebalance,” he said.

“The market may rebalance and oil prices may recover much sooner than expected. Steep production declines, stemming from supply disruptions in Canada and Nigeria, as well as a lack of new projects in the pipeline globally, all point in this direction.”


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