A new generation of Iraqis has formed an informal alliance with Iraqi clerics in a move that has the potential for a reimaging of the Iraqi state.
While no new policy agreements were reached to “freeze production” or set a new output target, OPEC emerged from its biannual ministerial meeting in Vienna on June 2 with a renewed sense of unity after years of discord. The unexpected success of the OPEC gathering was in large part due to Saudi Arabia’s new Oil Minister Khalid al-Falih’s diplomatic outreach to member states battered by the sharp drop in oil revenue and dismayed at the kingdom’s insistence on a “hands off” oil market policy amid prolonged lower oil prices.
Expectations were already low that ministers would agree on a new production policy, but concerns arose ahead of the meeting among OPEC colleagues and the oil market that an escalation of tension between Saudi Arabia and Iran would fuel a war for market share and inject more downward pressure and volatility into oil prices. Many oil analysts had already started penning OPEC’s obituary after the failed April meeting of OPEC and non-OPEC ministers in Doha, as well as bold public statements by Saudi Arabia’s powerful Deputy Crown Prince Mohammed bin Salman (MbS) that low prices were irrelevant and that the country was prepared to ramp up production to maintain market share.
Ahead of the meeting, market attention was already squarely focused on the new Saudi oil minister after replacing the influential 20-year veteran Ali al-Naimi. The widely respected and authoritative Naimi effectively led the organization during his tenure and his sparse words during OPEC meetings could turn the oil and financial markets on their heads. His departure, along with the rise of MbS in oil affairs, led to speculation that Saudi Arabia would limit its role within OPEC and was prepared to adopt a more aggressive oil policy. Falih is also a well regarded industry executive known as a pragmatic technocrat with a close working relationship with MbS and heavy responsibilities overseeing a newly expanded energy ministry, who may have little time for OPEC.
At his inaugural OPEC conference as minister, Falih quickly dispelled fears that Saudi Arabia would play a lesser role in OPEC. Falih was the first minister to arrive, three days ahead of the meeting, and immediately set about arranging bilateral meetings with other members, especially the countries suffering the most from lower oil revenue such as Nigeria and Venezuela.
Aside from reaffirming Saudi Arabia’s commitment to the group, the meetings allowed Falih an opportunity to discuss the Saudi-led strategy of abandoning production cuts to prop up prices and the need to maintain market share in the face of rising nonconventional oil supplies like U.S. shale. OPEC’s hands-off policy aimed at forcing more expensive shale oil to shut down has taken longer than expected, but Falih can rightly argue that nascent signs the market is rebalancing have emerged within the past few months and OPEC needs to stay the course. Though oil prices have recently rebounded, for some ministers the group’s failure to act is difficult to explain to their governments struggling with sharply lower oil revenue, poor economies, and political unrest.
Falih’s success in reengaging with fellow members managed to restore a semblance of equanimity to the group’s fractious history of negotiations and paved the way for the most constructive and harmonious meeting in years.
Equally, of paramount importance to other ministers and the oil market, Falih offered reassurances that the country would not flood the market in response to rising Iranian supplies. When asked by reporters on the sidelines of the meeting regarding earlier contentious comments by MbS about raising production, he said, “There is no reason to expect that Saudi Arabia is going to go on a flooding campaign.”
Falih’s constructive tone notwithstanding, the recent recovery in oil prices also helped improve the atmosphere. Even Iran adopted a more tempered stance in negotiations. Proposals to introduce a production ceiling emerged a few days before the meeting but Iran was quick to dismiss the value of such an action, saying it would not sign on to such an agreement. The media pitched the dispute as setting the stage for a battle with Saudi Arabia but in the end, the proposal was abandoned. For all practical purposes, OPEC members had largely ignored the ceiling for years anyway. OPEC suspended its official production ceiling at its acrimonious December 2015 meeting and some delegations were hoping to reinstate it as a show of OPEC solidarity. Iran’s oil minister managed to reject the proposal without causing an uproar. Indeed, in the end, OPEC simply agreed to maintain the status quo and in its official communique issued after the close of meeting, basically acknowledged the market was rebalancing on its own:
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 barrels per day (b/d) in 2016. Today, crude oil alone is lower by more than 1 million b/d from its peak at the beginning of 2015. Global demand is anticipated to expand by 1.2 mb/d after growing at 1.5 mb/d during 2015. This demand growth remains relatively healthy considering recent economic challenges and developments.
The calmer atmosphere also enabled the group to finally appoint a new secretary general after four years of trying. Nigeria’s Mohammad Sanusi Barkindo takes over the role from long serving Secretary General Abdullah el-Badri.
OPEC’s failure to agree on a new production policy has led some to echo past views that the group no longer has an impact on markets and is on its last leg. But to do so fails to recognize that the group’s inaction and more conciliatory approach at the Vienna meeting also averted unwanted pressure on oil prices.
OPEC’s division over the Saudi plan at its last formal meeting in December 2015 to basically produce at will and suspend the production ceiling triggered the collapse in oil prices in early January to the lowest levels in 12 years. The failure in Doha was expected to add further pressure on oil markets but prices rebounded by about 25 percent since then, led in part by unscheduled supply side outages due to instability in Libya and Nigeria as well as catastrophic wildfires in Canada’s oil producing region. The latest outages have hastened the rebalancing of oil markets, which was forecast by the end of 2016 or early 2017.
The recovery has vindicated Saudi Arabia’s 2014 decision to abandon attempts to control markets. Oil markets were taken aback when OPEC failed to announce a cutback in production levels to stem falling oil prices at its November 2014 ministerial meeting. Saudi Arabia recognized early on that the unprecedented arrival of unconventional shale oil production in the market, which was ironically made possible by advanced technology fueled by high prices, was a game changer. Previous decisions by OPEC to cut supply and boost prices would no longer work since the group would only be making room for more expensive shale in the market. Saudi Arabia essentially argued that the only remedy for low prices was to maintain market share and pressure prices even lower, which would make shale and other high cost supplies uneconomical, much to the objection of almost all members but fellow Gulf Cooperation Council countries. The unpopular strategy has started bearing fruit, albeit much slow than OPEC had envisioned. More expensive non-OPEC production, especially U.S. production, is forecast to decline this year by around one million barrels per day, according to the International Energy Agency.
Saudi Arabia has been steering OPEC toward acceptance of a more market driven policy for some time but Falih may have helped convince fellow OPEC members that the 60-year-old producer group needs to adjust to changing oil market dynamics. That said, for those members harkening back to the old days when a simple decision to cut production was all that was required to manage markets, Falih left the door open. In an exclusive interview with Argus Media, Falih said: “There could be shorter term situations in which, in our view, OPEC might intervene and yet other situations – such as long-term growth of marginal barrels – in which case it should not.” OPEC’s next ministerial meeting is scheduled for November 30.
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