The oil ministers from Opec meeting in Vienna for their regular bi-annual session decided to go with the status quo, a sign of their confidence that policy is working, but also of the fragility of the oil market’s recent recovery.
The lack of agreement over an overall output ceiling – with the previous one having been ignored for some time – or even nominal country quotas, is a reflection also of the wrangling between Opec’s effective leader, Saudi Arabia, and its political and oil market rival Iran.
But the overall sense from ministers at this week’s gathering in Vienna was that the relatively laissez faire policy of the last year-and-a-half was showing signs of working.
That included Saudi Arabia’s petroleum and mineral resources minister, Khalid Al Falih, who was named to the post last month to replace long-serving Ali Al Naimi, as part of the sweeping modernisation of oil (and economic) policy being pushed through by the deputy crown prince Mohammed bin Salman.
“As we have seen, demand growth was robust in 2015, and the first quarter of 2016 has also been healthy,” Mr Al Falih said yesterday.
“On the supply side, we have seen the pace of growth of high-cost oil declining. In fact, in my view, as the positive effect of healthy industry investments of the past decade wanes with the passage of time, the supply of expensive oil will be impacted even more,” Mr Al Falih, said in an interview with Argus, an oil market publication.
“The net result of the demand growth and the significant fall in expansion of high-cost oil is the start of rebalancing,” he concluded.
The view was echoed by Suhail Al Mazrouei, the UAE’s Minister of Energy, and other close Saudi allies.
The latest data show that oil production in the US is down sharply since last year, although the rate of decline has slowed. US data showed this week that domestic output was more than half a million barrels per day lower than last year, at just above 9.1 million bpd.
Some analysts see signs that the formerly booming shale oil sector in the US will undergo a further sharp contraction. More shale companies have filed for bankruptcy protection so far this year than in the whole of last year.
“Whilst filing for [bankruptcy protection] may not immediately result in declining production, it has undoubtedly shaken confidence in the system,” said Amrita Sen at Energy Aspects, who adds that those financing the US shale industry have said they want higher prices for longer before they’ll reinvest there, which alleviates the worry some had that an uptick in oil prices would only be met by a renewed flood of US shale supply.
But what is more certain is that there will be more supply from Iran in the coming months. Indeed, Iran’s determination not to be part of any effort to put a ceiling or country quotas on Opec members’ production ensured there would be no deal.
Iran’s oil minister said yesterday that since the deal with western powers in January, production has risen back to near the 4 million bpd level which prevailed before nuclear-related sanctions were imposed in 2012.
The Barclays oil analyst Miswin Mahesh said the rivalry between Saudi Arabia and Iran and their battle for market share – mainly in Asia – will be a “recurring theme” this year that he forecasts will mean lower prices in the fourth quarter before broader market forces continue the recovery next year.
Barclays is expecting average prices for benchmark North Sea Brent just above US$40 in the fourth quarter, but averaging $60 per barrel next year.
Where does that leave Opec’s role?
“It’s become an existential question for the cartel,” said Mr Mahesh. “But even as disorganised as this meeting has been, they are getting their market share back but at a cost in terms of lost revenues.”
Follow The National's Business section on Twitter