June 26, 2016

Market factors starting to support OPEC’s policies

Washington - The failure of the Organisa­tion of the Petroleum Ex­porting Countries (OPEC) to agree a production “freeze”, or a production ceiling prompted some energy ana­lysts to sound the death knell for the cartel.
The group, which soon turns 56 years old, has just increased its membership to 14, welcoming back Indonesia and Gabon, which had suspended their involvement.
It is not the first time that OPEC has been declared as at death’s door for not meeting oil markets’ expec­tations, nor will it be the last. It is also not the first time that OPEC heavyweights and regional rivals Saudi Arabia and Iran have been at loggerheads over production strate­gies but the current chasm between the two OPEC powers is influenced largely by external politics.
That the group’s June 2nd meet­ing was the OPEC debut of newly appointed Saudi Oil Minister Khalid al-Falih created more hype for the event.
Falih appeared determined to as­suage fears that Saudi Arabia’s in­terest in the organisation it helped found in September 1960 had di­minished with the dramatic de­parture of veteran Oil minister Ali al-Naimi and the ambitious and far-reaching changes in Saudi oil policy masterminded by Deputy Crown Prince Mohammed bin Salman bin Abdulaziz and his proactive role in all oil-related matters.
Falih arrived in Vienna several days in advance to be briefed by OPEC secretariat officials and to meet separately with other oil ministers before formal delibera­tions. There was no doubt he was in damage-control mode, hoping to mollify members who felt blindsid­ed when Riyadh at the last minute vetoed a production freeze deal be­tween OPEC and independent pro­ducers that was being negotiated in Doha in April.
Falih also provided soothing public statements likely intended to counter recent comments by Mohammed that the Saudi govern­ment was unconcerned about the state of oil prices. Falih said that “Saudi Arabia realises that price is a key part of the oil market formula — it balances supply and demand… We realise that a long time under lower prices does not bring enough supply to meet the rise in demand.”
That may have provided some encouragement to high-cost pro­ducers within the organisation that feel Riyadh is indifferent to their economic plight as a result of low oil prices.
Tehran made it clear in advance of the Vienna meeting that it was determined to surpass its pre-sanc­tions crude output of 4.2 million barrels per day (bpd) and would not participate in any OPEC agreement that would impede it hitting that target.
Iran has seemingly made good on its pledge to rapidly restore its oil production, with reports that it boosted its output to 3.6 million bpd in April, its highest level since November 2011. The question over Iran is of sustainability and wheth­er its oil fields can continue to in­crease output and maintain those levels.
OPEC ministers debated reinsti­tuting a production ceiling at their latest meeting after agreeing in December to abandon their 30 mil­lion bpd ceiling, a production target that was routinely ignored. While Saudi Arabia purportedly wanted a ceiling of 32 million-32.5 million bpd to be adopted to reflect current production levels from the group, Iran squashed that proposal and in­stead argued for individual quotas.
Saudi Arabia ramped up its pro­duction to 10.2 million bpd ear­lier this year and was comfortable freezing at that level, anticipating routine higher domestic demand for its crude that is needed to meet power needs during summer months. In Vienna, Falih dismissed the notion that his country would further boost production to pun­ish other producers and gain more market share.
“We will be very gentle in our approach and make sure we don’t shock the market in any way,” he said. “There is no reason to expect that Saudi Arabia is going to go on a flooding campaign.”
OPEC may be banking on the fact that not much needs to be tinkered with for the second half of 2016. There is the promise of improv­ing energy demand and ongoing decreased output from several of OPEC’s own members — such as Nigeria and Venezuela — as well as falling volumes from independent producers, including US shale pro­ducers, that could continue to shore up prices, which have rebounded to about $50 a barrel.
The International Energy Agency suggested in its May Oil Market Re­port that, with global oil stocks ex­pected to shrink dramatically from the first to the second half of 2016, there is reason to believe that “the direction of travel of the oil market [is] towards balance”.

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