OPEC defies Washington, agrees to cut production
WASHINGTON - Oil ministers from OPEC countries and independent producer allies spent a tumultuous two days of tense negotiations in Vienna before cobbling together a production cut agreement that will pull 1.2 million barrels per day (bpd) of oil from international markets heading into 2019.
This move is an effort by the OPEC+ alliance to correct a 30% collapse in oil prices over the past two months.
OPEC will account for 800,000 bpd of the volume cut, with the non-OPEC contingent led by Russia responsible for the remaining 400,000 bpd. The reductions will be made from October output levels and the agreement is to last through June 2019.
Adding to the intrigue in Vienna was a controversial breakfast chat between the Trump administration’s top official on Iran and Saudi Oil Minister Khalid al-Falih on the eve of the talks that raised eyebrows and the ire of Iranian Oil Minister Bijan Zanganeh.
Despite OPEC leader Saudi Arabia’s repeated insistence heading into the December 6-7 meetings that every oil producer involved in the OPEC+ alliance — including sanctions-hit Iran — must accept taking a reduction, Riyadh acquiesced to Tehran’s request for an exemption to save the overall deal.
With Venezuela and Libya also exempt from the agreement, the remaining members will each reduce output 2.5% from October’s levels.
The deliberations underscored deep divisions within OPEC and highlighted the dominant role that Russia plays in the OPEC+ alliance. Smaller OPEC producers, who already feel marginalised by Riyadh’s leadership position in the organisation, are increasingly uncomfortable with the cosy collaboration that has developed between Saudi Arabia and Russia.
Russian Oil Minister Alexander Novak reportedly played go-between December 6 to bridge differences between the Iranian and Saudi delegations before he shuttled to Moscow to coordinate with Russian President Vladimir Putin on Russia’s position on its own cuts. He returned to Vienna December 7 for final negotiations.
Russia had balked at reducing its oil output by more than 150,000 bpd but accepted a cut closer to 230,000 bpd. Novak noted that the Russian decrease would be gradual due to climatic conditions that affect Russia’s oil fields.
The OPEC+ alliance, which has been coordinating production levels for two years, went to Vienna urgently needing to address prices that have fallen to 12-month lows since early October due to market oversupply.
The saturated market conditions had partly resulted from Saudi-led efforts to pump more oil at the Trump administration’s urging to ensure market stability in the face of US sanctions on Iran. However, Riyadh and its allies felt deceived watching US crude production hit record highs and Washington granting sanctions waivers to eight countries buying oil from Tehran.
This time, OPEC and its allies were set to defy the wishes of US President Donald Trump, who has routinely publicly lambasted the producers, accusing them of pushing up oil prices unnecessarily. On December 5, Trump tweeted: “Hopefully OPEC will be keeping oil flows as is, not restricted. The world does not want to see, or need, higher oil prices!”
The OPEC+ alliance has not only received blowback from the US leader: The International Energy Agency (IEA) warned against cuts that could lead to higher oil prices.
IEA Executive Director Fatih Birol called on producers and consumers “to have common sense in these difficult days” and said he hoped “prices do not rise again because this will not really be good news for the global economy which is very fragile.”
However, in its November market report, OPEC argued that demand for its oil in 2019 would be 1.1 million bpd less than 2018 and approximately 1.4 million bpd below current OPEC production.
A secret breakfast meeting between Falih and Brian Hook, US special representative for Iran, on December 5 may have factored into Riyadh’s calculations for the collective output reductions or at least their duration.
The Saudis initially denied the meeting had taken place but Falih confirmed it and said he discussed the US sanctions on Iran with Hook and how the sanctions would move forward. The US waivers granted to eight countries, allowing them to continue purchasing Iranian crude, are to be reviewed after six months, with buyers expected to demonstrate they have effectively reduced their Iranian oil volumes over that period.
Upon hearing about the meeting between Hook and Falih, Zanganeh blasted the Trump administration for its “interventionist” approach in comments carried by his ministry’s official news service: “If Mr Hook has come to Vienna to apply for US membership in OPEC, and this is the reason why he meets OPEC members, this request shall be reviewed. OPEC is an independent organisation and is not part of the US Department of Energy to take orders from Washington,” declared Zanganeh.