The de­ci­sive deal is still elu­sive for oil

The Pak Banker - - OPINION - John Def­te­rios

IN­VESTORS were sens­ing a bold agree­ment be­tween Opec and nonOpec pro­duc­ers to cut oil out­put as the at­tempt to raise prices was be­ing cooked up be­hind the scenes. But seal­ing that deal did, per­haps, not serve the in­ter­ests of the world's largest ex­porter - Saudi Ara­bia.

Opec mem­ber Venezuela, ar­guably the coun­try most des­per­ate for an agree­ment due to it crum­bling econ­omy, sounded an op­ti­mistic tone that a deal to cut pro­duc­tion was go­ing be se­cured. "We're on a very, very, very good path," said Eu­lo­gio Del Pino, Venezuela's oil min­is­ter and pres­i­dent of state oil com­pany PDVSA. He had com­pleted a week- long tour of the Middle East and Rus­sia in an at­tempt to se­cure com­mit­ments by the ma­jor pro­duc­ers. In­stead, there was only an agree­ment to hit the pause but­ton and freeze pro­duc­tion at Jan­uary out­put lev­els. This ef­fort showed a col­lec­tive aware­ness of mar­ket pres­sure, but re­quired no sac­ri­fice by the pro­duc­ers them­selves. It was telling what Saudi Ara­bia's pow­er­ful oil min­is­ter had to say af­ter what has been de­fined now as the Doha agree­ment.

"We don't want re­duc­tion in sup­ply. We want to meet de­mand and we want a sta­ble oil price," said Ali Al Naimi. That of course went counter to the de­mands of Venezuela and Nige­ria who both went pub­lic over the past month sug­gest­ing that cur­rent prices are im­pos­ing too much pain on their re­spec­tive economies. Rat­ings agency S&P con­curred and down­graded Saudi Ara­bia, Bahrain, Brazil, Oman and Kaza­khstan two days af­ter the plan to freeze pro­duc­tion.

But the en­ergy min­is­ter of Qatar and cur­rent ro­tat­ing pres­i­dent of Opec clar­i­fied the pri­or­i­ties be­hind the move be­tween Opec and non-Opec play­ers. "This step is meant to sta- bilise the mar­ket and to be ben­e­fi­cial not only to the oil pro­duc­ers and ex­porters, but also to the world econ­omy," said Mo­ham­mad Al Sada, who spear­headed this ef­fort with his Venezue­lan coun­ter­part.

A day later, the duo went to Tehran to gauge in­ter­est from Iran, which sup­ported stabilising the mar­ket, but af­ter hav­ing sanc­tions lifted last month pub­licly sidestepped the is­sue of freez­ing its own pro­duc­tion. The ini­tial mar­ket rally be­fore the Doha meet­ing was trig­gered by com­ments from the UAE's Min­is­ter of En­ergy Suhail Mo­ham­mad Al Mazroui. While on a state visit to In­dia, Al Mazroui told Sky News Ara­bia that Opec was will­ing to co­op­er­ate with non-Opec pro­duc­ers.

Per­haps in­vestors be­came overly ex­cited since it sig­nalled a po­ten­tial shift by the Gulf pro­duc­ers who have stead­fastly backed the Saudi Ara­bia- led strat­egy to se­cure mar­ket share rather than pro­tect prices. Even be­fore the Doha meet­ing, the chair­man of Saudi Aramco did not hide the king­dom's po­si­tion. "We are not go­ing to ac­cept to with­draw our pro­duc­tion to make space for oth­ers," said Khalid Al Falih, chair­man of Saudi Aramco, at the CNN en­ergy roundtable at the World Eco­nomic Fo­rum.

But like the UAE, he too left the door open if there is a com­mit­ment from all the ma­jor play­ers. "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," Al Falih con­cluded. Get­ting all the play­ers lined up re­mains no sim­ple task - even for freez­ing, not cut­ting pro­duc­tion. Take Rus­sia for ex­am­ple. En­ergy min­is­ter Alexan­der No­vak said ideas were pro­posed "to cut pro­duc­tion by each coun­try by up to 5 per cent", but added at the time, "it was too early to talk about it".

In­deed it re­mains too early for such a bold move. But Igor Sechin, the chief ex­ec­u­tive of Rus­sia's largest oil com­pany, Ros­neft, took a harder line. He pointed to Opec's over­pro­duc­tion for the near 50 per cent cor­rec­tion since June of last year. Ac­tu­ally, there is plenty of fin­ger point­ing to go around. Ac­cord­ing to the In­ter­na­tional En­ergy Agency, the 13-mem­ber group pro­duced a record 32.6 mil­lion bar­rels a day in Jan­uary, and Rus­sia at just a hair below 11 mil­lion bar­rels is main­tain­ing record out­put. That is why the IEA re­cently said that sup­ply could ex­ceed pro­duc­tion in the first half of this year by 1.75 mil­lion bar­rels a day and may be what even­tu­ally forces the largest pro­duc­ers in the world to find some sort of so­lu­tion to cut pro­duc­tion.

But some be­lieve Saudi Ara­bia will wait things out, de­spite bud­getary pres­sures. "The Saudis are like a po­lice­man in a traf­fic jam when no­body has lis­tened to them and they have gone away and the traf­fic is messy," said Ferei­dun Fe­sharaki, Founder and Chair­man of con­sul­tancy FACTS Global En­ergy. "So when ev­ery­one is pre­pared to lis­ten, they come back," sug­gest­ing that may not hap­pen un­til 2017.

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