An oil diplo­macy with lim­ited gain out­put

The Pak Banker - - OPINION - Saadal­lah Al Fathi

IT looks like the mar­ket eu­pho­ria over the ac­cord be­tween Saudi Ara­bia and Rus­sia to freeze oil pro­duc­tion at Jan­uary's level, if other pro­duc­ers agree, is evap­o­rat­ing and re­al­ity grad­u­ally sink­ing in.

Nev­er­the­less, the oil diplo­macy has given hope to im­prove prices at a time when they have sunk to the 2003 level. The mere fact that Ali Al Nuaimi, the Saudi oil min­is­ter, and his Rus­sian coun­ter­part, Alexan­der No­vak, met in Doha on Fe­bru­ary 16 and agreed to freeze pro­duc­tion is taken as har­bin­ger for some­thing more to come if other pro­duc­ers came on board.

The meet­ing was the cul­mi­na­tion of ex­pec­ta­tions in re­cent weeks that pro­duc­ers driven by low prices will do some­thing to sal­vage the sit­u­a­tion. It was also fu­elled by the op­ti­mistic state­ments of the Venezue­lan Min­is­ter Eu­lo­gio del Pino af­ter his visit to Rus­sia and Saudi Ara­bia. Some even went to the ex­tent that there was a pro­posal to re­duce global oil pro­duc­tion by 5 per cent - but this was quickly dashed as it was thought dif­fi­cult to gather sup­port around it. The meet­ing in Doha was hosted by Qatar and the Venezue­lan min­is­ter was also present. The two coun­tries im­me­di­ately an­nounced their agree­ment to the ac­cord and so did Iraq, Kuwait and the UAE ... but oth­ers re­mained silent.

Price gy­ra­tion Ini­tially, prices went up as a re­ac­tion to the ac­cord and even be­fore wait­ing for other pro­duc­ers to an­nounce their agree­ment or not. But the rise was mod­est as Brent set­tled at $34 (Dh125) a bar­rel com­pared to the 12 per cent rise on Fe­bru­ary 14, driven sim­ply by the ex­pec­ta­tion that pro­duc­ers are about to agree to a pro­duc­tion cut.

Prices quickly re­sumed their gy­ra­tion and started fall­ing again. They rose as Iran gave its bless­ing to the ac­cord with­out any com­mit­ment to be part of it af­ter a meet­ing be­tween the Venezue­lan and Qatari min­is­ters with their coun­ter­parts from Iran and Iraq in Tehran.

An­a­lysts ex­pected that Iran will not agree to freeze its pro­duc­tion as it just came out of the UN sanc­tions and would want to re­claim 1.5 mil- lion bar­rels a day (mbd) of lost ex­ports be­fore sanc­tions were im­posed. Ros­neft, the largest Rus­sian oil pro­ducer, said they have many ques­tions re­gard­ing the ac­cord and want suf­fi­cient guar­an­tees form Saudi Ara­bia and Iran. This has put a dent into the Rus­sian min­istry of en­ergy's po­si­tion as it had wel­comed the ac­cord.

The mar­ket was also not im­pressed by the du­ra­tion of the ac­cord - three months - to dis­cover the im­pact on the mar­ket and to see if com­mer­cial oil stocks would fall.

How­ever, the Saudi min­is­ter kept the door open when he said the ac­cord is only the be­gin­ning of the dis­cov­ery process in the next few months be­fore de­cid­ing whether fur­ther ac­tion is needed to sta­bilise prices. Dashed hopes But the Saudi for­eign min­is­ter Adel Al Jubair soon dashed the hopes of the mar­ket when he told AFP that his coun­try is "not pre­pared" to cut pro­duc­tion. Prices fell 3.5 per cent as a re­sult and, as I write, prices fell again for Brent and WTI to set­tle at $33.01 and $29.64 a bar­rel re­spec­tively on Fe­bru­ary 19.

It is im­por­tant to be re­al­is­tic about the ac­cord be­cause freez­ing does not mean a re­duc­tion of pro­duc­tion. The IEA is say­ing that in the first half of 2016, pro­duc­tion is ex­pected to be higher by 1.75 mbd over de­mand. This is over and above the sur­pluses of 2014 and 2015, which pushed the OECD's com­mer­cial stocks to their high­est level of 2,971 mil­lion bar­rels by end Novem­ber and even higher by now. Such stocks will al­ways be an over­hang on the mar­ket and threaten prices. There are even fears that stor­age ca­pac­i­ties are ap­proach­ing its op­er­a­tional thresh­old.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.