Much to Alberta’s oil patch dismay, Qatar’s Minister of Energy & Industry appeared before a dozen microphones Sunday evening to announce the failure of negotiating parties to reach an agreement to freeze oil production levels. The historic meeting in Doha, which was the first in 15 years to include 18 energy ministers from OPEC and non-OPEC countries, was intended to cap oil production at January 2016 levels in an attempt to bring back some balance to the oil markets worldwide since the mid-2014 glut began.
The delegates need more negotiation and consultation time, and will reconvene in June during the upcoming OPEC meeting; as per the Qatari Minister’s closing statement.
Until then, what are the possible market scenarios?
Doha-based Aljazeera TV channel (Arabic) hosted Dr. Mostafa Al-Bazergan; Chairman of the UK-based ‘Iraqi British Business & Investment Council’, and Mr. Mostafa Abdul-Salam; Editor of Economics at the UK-based ‘The New Arab’ news portal, to analyze and discuss the meeting’s outcomes. Here’s my rough translation of the 15-minute interview:
Media Translation – Arabic to English:
Host: What do you make of the Qatari Minister’s concluding remark?
Mostafa Abdul-Salam (MAS): The meeting has obviously failed, despite the fact that 12 countries controlling 73% of total global production were pushing for an agreement, and that, for once, Saudi Arabia and Russia agreed on an energy strategy; that’s 20% of global production for those two countries alone. Political stubbornness on behalf of Saudi Arabia and Iran doomed the meeting.
Mostafa Al-Bazergan (MAB): The meeting ipso facto is a success; Russia have always refused to meet with OPEC previously. Saudi Arabia’s position has been clear for a year now: the country will not back down unless all producers are on board. Iran, on the other hand, is still hampered by the sanctions imposed by the US, despite the lifting that occurred few months back. The country is still unintegrated in the global financial system, and institutions worldwide still fear penalties for doing business with Iran. For example, not a single representative of any central or local financial institution agreed to meet with Iranian delegates in a finance convention here in London just a month ago.
I believe the Ministers have postponed agreeing on a deal to June, until they come about the Iran dilemma.
Host: Do you think OPEC could give leeway to Iran? Why would they, when Iran could use the economic advantage against its rivals in the region?
MAS: The economics have been shadowed by politics in the Doha meeting. Iran has been challenging Saudi Arabia in Yemen and elsewhere, and statements made by the Saudi Deputy Crown Prince to Bloomberg network didn’t leave room for optimists. A compromise could have been made: an elastic agreement of sorts between Saudi Arabia and Russia to signal an uptick to anxious markets. The sanctions on Iran were starting to lift in January when it produced 700 thousand barrels-a-day. Now it’s planning to ramp up its production to 4 million, and OPEC is not ready to give Iran this advantage as evident by the meeting’s conclusion.
Host: Do you think a compromise was possible, especially that a no-deal outcome is unfavorable for everyone involved?
MAB: Statements made by Iranian officials few weeks leading to the meeting made it apparent that chances for a compromise were slim. Iran claimed in the past that it won’t use its oil against US interests, but now with refusing the production freeze, it is pitting against the US allies in the Gulf Cooperation Countries (GCC).
I’d like to point out that US shale producers share the blame too for the price collapse in 2014. Now, 40 out of 200 US shale oil producers have filed for bankruptcy, and can’t get any finances from loaning institutions. Only 14% of US shale production is feasible at $40 a barrel.
Host: How would the meeting outcomes reflect on oil prices?
MAS: Let’s not get overly optimistic about the OPEC June meeting; after all, OPEC members only produce 30% of total oil production. The chance for a consensus by both OPEC and non-OPEC countries on boosting prices have just been missed.
Prices could fall a little bit, but not more. Markets worldwide were anticipating a non-agreement, especially that Iran and Libya didn’t attend the meeting, while Iraq has been backing Iran’s position. Let alone the unwavering statements announced by Saudi Arabia. On the other hand of the equation, Venezuela and Algeria were actually hoping for a production decrease, but lessened their expectations to only a freeze.
MAB: Several points here: a decrease in production was never on the table; it wasn’t even discussed in the media. Iran’s position became apparent in the few weeks leading to the meeting, so markets prepared themselves for the bad news. All the while, non-OPEC attendees were not expected to act alone, feeding back into the markets’ low expectations.
I expect the markets to dip 8 to 10% on Monday morning only to stabilize at current rates, until, of course, the meeting in June.
Host: What about production levels post the no-deal verdict?
MAS: Well, there’s a race going on between producers to sell more oil in the global market, especially that the producers’ economies have been grounded with the 70% price drop since mid-2014. Many producers, including those in the GCC, put forth new austerity-like measures and cut on spending. Reports suggest that rich GCC countries need to borrow $300 billion to reduce their budgets’ deficit. The situation is much worse for likes of Venezuela and Algeria.
In my estimation, producing countries will continue with current production rates. Some will seek to boost their production, on the contrary. Libya, for example, is expected to ramp its production the minute it achieves political stability, as it used to produce 2 million barrels-a-day as opposed to its current rate of 300 thousand only. Iraq, too, is in dire need to support its ailing economy. All these countries, including Russia, will be seeking to pile-up their depleted foreign reserves over the next phase.
Host: Do you think Iran will change its position come June, especially that its allies, Russia and Venezuela specifically, are suffering economically?
MAB: I expect new geopolitical developments to surface in the region soon; ones that Iran can use as pressure cards leading to the next meeting, despite its bleeding economy and its allies’. Of course, Russia will try to push Iran for a compromise, especially at a time when Iran & the US are finding themselves in agreement on different files in the Middle East. The status of lifting the sanctions would play a role too in Iran’s behaviour. All in all, Russia would be the biggest winner if an agreement is reached eventually.
MAS: Russia has tried to convince Iran to agree on a reduction in production in February and failed. I don’t see it succeeding in June.
The key to Iran’s alignment is gaining political advantages vis-à-vis Saudi Arabia. I believe prices will remain on current levels all of 2016, given the slowing of Chinese and European economies and the consequent weakening in demand for oil globally.
Host: Do you agree, Dr. Al-Bazergan?
MAB: I agree that prices will keep fluctuating at current levels, but only for the first half of 2016. These prices will force US shale producers out of the market as their debts pile up, and their production will decrease an amount between 750 thousand and 1 million barrels-a-day by the end of the year.
Basel Ismaiel is the associate editor for environmental issues at iAffairs and holds an MBA from the Sprott School of Business in Carleton University in Ottaw. He has worked in environmental engineering and policy making in businesses and not-for-profit organizations, including RWDI, The Natural Step Canada, and Dubai Carbon. Connect with Basel at firstname.lastname@example.org
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