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OPEC once again proves its mettle
Published in The Saudi Gazette on 02 - 10 - 2016


OPEC has salvaged itself from the brink!
Few had projected so. OPEC did it once again. Wrong footing pundits and overcoming skepticism, after two days of round-the-clock deliberations in Algiers, OPEC oil producers agreed to slash their combined output to 32.5 million bpd, from 33.24 million bpd averaged in August.
And in the process the group has proven, once again, that it remains relevant to the global energy conundrum and that it still has the capacity and the will to narrow down its differences and continue to impact the global energy markets in a significant manner.
"We have decided to decrease the production around 700,000 bpd," Iranian Oil Minister Bijan Zanganeh told reporters after the meeting. "OPEC made an exceptional decision today ... after two and a half years, OPEC reached consensus to manage the market," Zanganeh emphasized. OPEC, which supplies about 40% of the world's crude, is expected to iron out the details of each country's specific production limits at its next formal meeting in Vienna on Nov. 30.
The decision marked the end of the market share battle too. "This is the end of the ‘production war' - OPEC claims victory," Reuters quoted Phil Flynn, analyst at Chicago-based brokerage Price Futures Group. "The cartel proved that it still matters even in the age of shale!"
With many writing off the group as a coherent force, at stake in Algiers was OPEC's very future. If the organization was to stay, it needed to prove itself.
OPEC ministers realized that. An apparent sense of urgency was visible in OPEC ranks as they sat down in Algiers for the marathon. "Our expectations about the rebalancing process have shifted," OPEC President Dr. Mohammed Bin Saleh Al-Sada said in his inaugural address before the onset of the close-door session. "It is evident that there is now a greater degree of urgency to ensure the market returns to balance as quickly as possible," he said, conceding it was important for the Organization of the Petroleum Exporting Countries to leave the meeting with a message that will help stabilize the market.
Saudi Energy Minister Khalid Al-Falih, the most influential voice inside the meeting room also added his weight behind. "We need a gentle adjustment to reassure the market," he said at a briefing while flanked by his Russian counterpart, Alexander Novak.
With many writing off OPEC, prophesizing its end, the group needed to act – the ministers present on the day knew and conceded.
Behind the scene, energy diplomacy too went in overdrive. Russian Energy Minister Alexander Novak met Zanganeh on Tuesday in what was reported to be a "new attempt to persuade Tehran to play ball." Several other sources quoted by Reuters said in a bid to rescue a deal, Algeria and Qatar were also talking to Iran.
Results became evident. Even before the news of deal, for the first time Iran indicated it was ready. Oil Minister Zanganeh said his country would agree to curb production "at close to 4 million bpd." The remarks represented a narrowing of the differences within the OPEC ranks.
Earlier on Tuesday, Saudi Energy Minister Khalid Al-Falih too publicly conceded that Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits which could be set as early as the next OPEC meeting in November.
That represented a strategy shift in Riyadh's position too. Until then Riyadh has been emphasizing it would reduce output to ease a global glut only if all other OPEC and non-OPEC producer followed suit. Iran has however, been arguing it should be exempted from such limits as its production recovers after the lifting of sanctions on its oil trade.
Michael Wittner, global head of oil research at Societe Generale in New York, thus had a point when he told the press, the deal to reduce output could "potentially be very significant" not so much for the number of barrels it could take out of production, but also because it signals Saudi Arabia is considering a return to active supply management. "To me, the significance is way beyond that - they all sat down in a room and made a decision."
The decision had an immediate impact. The very prospect of OPEC returning to its traditional role of propping up oil prices with production cuts - a weapon it had kept sheathed since oil prices fell in 2014 - sent the crude market on a wild ride. Markets surged. Prices spiked almost instantly by almost six percent. By Wednesday evening, Brent crude settled up $2.72, or 5.9 per cent, at $48.69 a barrel, hitting a more than two-week high of US$48.96. US West Texas Intermediate (WTI) crude too rose by $2.38, or 5.3 per cent, to settle at $47.05, after a peak $47.45 - highest since Sept 8.
Yet, skepticism continues to make rounds. Prices retreated the next day, as questions hanged over the effectiveness of the deal. Many saw a selloff down the road, citing OPEC's general lack of adherence to quotas. Questions kept being asked, how much will each country produce under the new, output constraint regimen; would everyone agree to make the required cuts in output to limit it to 32.5 million bpd; what would be the state of production in Nigeria, Libya and Iran by November, when OPEC would need to agree on output quotas?
Many hence felt there was a lack of clarity over too many details and there was a risk the deal could unravel. "With such uncertainty around the minutiae, we expect uncommon volatility in the oil market until OPEC's November meeting," analysts at ING told the press.
Then there is another issue too: If prices continue to rise, as a consequence of OPEC output restraint, it could also lead to a surge in non – OPEC shale production too, making the current glut grow even further.
Higher prices could definitely activate more US shale oil production, most agree.
Already output from Kashagan, which holds an estimated 16 billion barrels of oil, is also due to impact the markets adversely later this year. Production from the giant field is expected to ramp up initially to 180,000 barrels per day and further to 370,000 bpd the next year. How would that be handled?
OPEC needs to get clean on all these. Yet, at this point in time, it can claim to have the upper hand.
Interestingly on the day OPEC acted, the EIA too released its reserves data, underlining the US crude supplies fell by 1.9 million barrels in the week ending Sept. 23. To some it reflected tightening of the markets, especially if OPEC succeeds in implementing the Algiers decision in true spirit.
Despite being written off by many and the obituaries done by most, OPEC is alive and kicking. It is relevant today too!


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