Time for all oil pro­duc­ers to go be­yond the talk

The Pak Banker - - OPINION - John Def­te­rios

IN a mar­ket look­ing for clearer guid­ance, the ma­jor oil pro­duc­ers of the world are busy send­ing mixed sig­nals, which are leav­ing crude prices in limbo. The cost of a bar­rel of crude soared 7 per cent a week ago af­ter Rus­sian En­ergy Min­is­ter Alexan­der No­vak said that Opec and non-Opec coun­tries are con­sid­er­ing a 5 per cent out­put cut across the board. No­vak cau­tioned that it is too early to call any­thing con­crete, but there seems to be a will­ing­ness to build a solid floor to sup­port a price re­cov­ery. That same day, a se­nior Gulf source told me that re­gional play­ers are "will­ing to do any­thing to sta­bilise the mar­kets" and added, rather sur­pris­ingly for those of us who cover the in­ner work­ings of Opec, "all op­tions are on the ta­ble".

Im­ple­men­ta­tion of an across-the-board cut is clearly eas­ier said than done. The task of round­ing up all the play­ers is down at this stage to Eu­lo­gio Del Pino, Venezuela's new Min­is­ter of Pe­tro­leum and Pres­i­dent of state oil gi­ant PDVSA. This week he vis­ited Rus­sia, Qatar and Saudi Ara­bia to see if there's sup­port for an emer­gency meet­ing. But this is also be­ing dis­cussed at the high­est lev­els of govern­ment at the same time. Rus­sia's For­eign Min­is­ter Sergei Lavrov was in Abu Dhabi to jump-start the Syria peace process and talk about the state of oil with His High­ness Shaikh Mo­ham­mad Bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Com­man­der of UAE Armed Forces .Lavrov said there is co­op­er­a­tion on oil with coun­tries in­side and out­side of Opec, and that a for­mal meet­ing could be called "if ev­ery­one wants it". If one goes back to the CNN panel at Davos two weeks ago called ' The New En­ergy Equa­tion', the Chair­man of Saudi Aramco used what could be called a "car­rot and stick" ap­proach. Khalid Al Falih started off by say­ing, "We are not go­ing to ac­cept to with­draw our pro­duc­tion to make space for oth­ers," which was a pointed ref­er­ence to re­gional ri­val Iran, who is ea­ger to add a mil­lion bar­rels a day of pro­duc­tion by the end of this year. He also bluntly stated that with the low­est cost pro­duc­tion in the world, the king­dom could live with low oil prices "for a long, long time".

But dur­ing the same ses­sion, Al Falih con­curred with my se­nior Gulf source and said, "If there are short term ad­just­ments that need to be made and if other pro­duc­ers are will­ing to col­lab­o­rate, Saudi Ara­bia will also be will­ing to col­lab­o­rate."Those I spoke to on back­ground wanted to make it crys­tal clear that the idea of a 5 per cent cut is not a pro­posal wrote by Saudi Ara­bia, but that the King­dom would not stand in the way of a deal. So the multi bil­lion-dol­lar ques­tion is where does that leave us to­day? In­vest­ment bank­ing gi­ant Gold­man Sachs, which has been one of the most bear­ish firms when it comes mar­ket over­sup­ply, said it's too late for the ma­jor play­ers to save oil.Gold­man be­lieves that with the over­pro­duc­tion cur­rently in place, about one and a half mil­lion bar­rels a day, North Sea Brent will bust through the re­cent 13-year low of some $26 a bar­rel. The head of the In­ter­na­tional Mon­e­tary Fund is one who said she is los­ing sleep over that sce­nario. Chris­tine La­garde sug­gested there are quite a few coun­tries that will suf­fer in the near term due to an over re­liance on crude ex­ports. Venezuela, Kaza­khstan, Al­ge­ria, Azer­bai­jan and Nige­ria make up a hand­ful of coun­tries that stand out for all the wrong eco­nomic rea­sons. The fi­nal two on that list have al­ready wel­comed in­ter­na­tional lenders like the IMF and World Bank to ex­plore bor­row­ing op­tions to plug holes in their bud­gets.

For­mer US Sec­re­tary of State Madeleine Al­bright told CNN this week, "Venezuela is about to go belly up, not only po­lit­i­cally, but eco­nom­i­cally." There is a mar­ket con­sen­sus form­ing that be­lieves the Saudi-wrote strat­egy will work, but that it will take a year longer than orig­i­nally an­tic­i­pated. A half mil­lion bar­rels of US pro­duc­tion came off the mar­ket in 2015 and I have seen es­ti­mates of up to an­other 900,000 bar­rels be­ing knocked out this year. At the same time, con­sul­tancy Wood Macken­zie said that 27 bil­lion bar­rels of projects worth nearly $400 bil­lion have al­ready been can­celled. Sig­nalled out in the cancellations were ma­jor deep­wa­ter in­vest­ments in An­gola, Nige­ria and the Gulf of Mex­ico. Il­ham Aliyev, the Pres­i­dent of Azer­bai­jan, said he was pre­par­ing his coun­try for what he called a "post-oil era" in about 20 years, but clearly it has ar­rived early.

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