Opec’s secretary general warned of consequences for oil prices if major producers do not reach a credible deal in three weeks to curb output.
Mohammad Barkindo, who became Opec’s secretary general in August, presided over a surprise deal a month later in Algiers in which Opec and a group of six other countries, including Russia, one of the world’s top three producers, agreed in principle to curb output to speed the rebalancing of a chronically oversupplied market.
However, details of the deal were left to be worked out in talks in the intervening months before a full ministerial gathering of Opec in Vienna on November 30.
“I think there is a convergence of views,” said Mr Barkindo, in an interview on the sidelines of the Abu Dhabi International Petroleum Exhibition and Conference (Adipec).
“Failure to implement the Algiers accord in full and in a timely fashion will, of course, bring some consequences to an already fragile state of the industry.”
The Algiers agreement was unexpected as it came two years into a policy by Saudi Arabia and its close Arabian Gulf allies, the UAE, Kuwait and Qatar, to protect market share and force higher-cost producers – US shale, Canadian oil sands, offshore projects – to bear the brunt of cuts needed to balance the market.
While the policy had been working, in particular forcing a reduction of nearly 900,000 barrels per day in US production, from a peak of 9.6 million bpd to 8.5 million bpd, tepid world economic growth has meant that inventory levels have been slow to come down.
That has been reflected in oil prices, which recovered this year from benchmark lows around US$30 per barrel to the mid-$50s. But traders have been unnerved by the haggling over the Algeria deal, with oil prices dropping in November by about 12 per cent.
“The rebalancing of the fundamentals of this market has taken a very long time, probably the longest we’ve ever seen,” said Mr Barkindo. “But failure to jointly act with our non-Opec friends in accordance with Algiers will further elongate this period of instability.”
Still, there is no clear sign yet from the 14-member group, nor the six other countries who have joined the process, of a shared commitment to restrain output. Within Opec, the deal was to cap output for an indeterminate time at between 32.5 million bpd and 33 million bpd, implying an overall cut of 700,000 bpd.
But some members will be given special dispensation: Iran, Libya and Nigeria will be “given special consideration [and] their circumstances taken into account,” Mr Barkindo said, referring to the internal strife – or, in the case of Iran, international nuclear-related sanctions – that had dropped their production.
Some other members have also pleaded special circumstances – Iraq, which is at war with militants in its western region, and Venezuela.
Mr Barkindo said, however, that the details of whether there is a freeze or a cut, or which members will agree to what specific commitment, “are mere semantics”. The important thing was to get an agreement.
The fuzziness over what exactly Opec members and non-Opec members are negotiating over is a factor in the market’s wavering and volatility.
One of the non-Opec oil ministers involved in the process is also unclear about what exactly is the goal.
“I have no idea what non-Opec will do,” said Mohammed bin Hamad Al Rumhy, Oman’s oil minister. “I’m on record as saying we are ready to cut between 5 and 10 per cent and we stand by that. I don’t think they will take it serious. Whether there will be a consensus to cut I doubt it. But … if we manage to come up with an agreement to freeze that will be, I think, a victory to all of us and that will stabilise the market.”
Oman’s own production has been steadily increasing over the past decade and is at about 1 million bpd, but Mr Al Rumhy said he personally has taken a 55 per cent pay cut and the whole country has had to endure similar cutbacks during the past two years as oil prices have plummeted.
“I think every producer should pledge to freeze, whoever can freeze,” although he agreed some countries have a special case. “For some countries, oil production is the least of their concerns, there are human lives at stake.”
The problem for the market is that such a deal will seem leaky and lack credibility.
Goldman Sachs pointed out last month that even with a deal to freeze output – the most likely outcome – the higher production from those allowed exception would be enough to keep the market in glut.
“Higher production from Libya, Nigeria and Iraq is reducing the odds of such a deal rebalancing the oil market in 2017,” the bank said in a report assessing the deal.
amcauley@thenational.ae@thenational.ae
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