The Fuse

Fresh Optimism Voiced on Morning of OPEC Ministerial Meeting

by Leslie Hayward and Matt Piotrowski | November 30, 2016

Oil markets and analysts have been skeptical that a deal would emerge from this week’s OPEC meeting, following stonewalling from ministers and signals of willingness to walk away without a deal from Saudi Arabia. But cartel members struck an optimistic tone that a deal will be achieved today in Vienna, sending oil prices up by 6 percent.

Of particular note were shifts in language from Iraq and Iran to reporters ahead of the meeting.

Iran, which has remained steadfast in its refusal to agree to a production ceiling below its pre-sanctions output levels, said upon arriving in Vienna yesterday that it would “not cut.”

This morning, Oil Minister Bijan Zangeneh added that Iran is “ready to compromise.”

“We haven’t finalized the deal… We need time to discuss and finalize the deal between OPEC member countries, but as I said I am optimistic that we are in a position to enable us to finalize this framework,” Bijan Zangeneh said.

“We want to be back at pre-sanctions levels,” he added. The country produced just under 4 mbd, similar to current levels, before Western countries implemented sanctions against Tehran back in 2011 and 2012, but since they’ve been lifted in the past year, the country has boosted output to 3.69 mbd, based on secondary source estimate. The country’s own figures claim its production is higher at 3.92 mbd.

The Iran production figures, and whether the country will be subject to a freeze or an actual cut, could be the meeting’s largest source of tension.

“It’s not a freeze, it’s another arrangement,” said Zanganeh, without elaborating and again dismissing the idea of his country participating in a formal cut.

Saudi Arabia has indicated it would accept only secondary source numbers as baseline production figures.

Given the longstanding animosity between Saudi Arabia and Iran, buy-in from Iraq—OPEC’s second largest producer—has been critical for today’s meeting. Iraq’s oil production remains a thorny issue within the cartel, and has threatened to derail a deal ever since the outline of one was agreed in Algiers in late September. The war-torn country has ramped up output quickly in an attempt to boost revenues to help its beleaguered budget and to fight militant group ISIS. For its October output, Iraq told OPEC through direct communication that it is producing 4.77 million barrels per day, but secondary sources—impartial observers—say that output is some 200,000 b/d below that figure. It’s unclear if Iraq would agree to cut from the lower levels given from secondary sources. Saudi Arabia has indicated it would accept only the secondary source numbers as baseline production figures.

“We will agree on a cut but we have not defined the number,” Jabbar al-Luaibi, Iraq’s oil minister, said Wednesday morning at OPEC headquarters.

When talking to the press ahead of the group’s meeting, the Iraqi minister wouldn’t give details on its current production. When asked about current oil production, he said, “I’ll tell you later” with a laugh. Nor did he comment on what baseline output levels it would accept under an agreement.

However, like other ministers, he said he was optimistic a deal would happen and that it would ultimately be effective in pushing prices upward. Al-Luaibi said, “Iraq is ready to cut within the framework of the country’s interest.”

One big concern—among OPEC members, market watchers, and traders—is whether, if there is a deal, member countries will actually follow through on their pledges. The Saudis, in the past, have had to carry the burden of cuts because of others’ non-compliance. This has led to a lack of trust in the organization. Al-Luaibi explained that if there is a deal, there will be a committee to monitor a production cut over the next six months.

He was optimistic that a deal would bring about stability in the market and possibly push the market above $55 per barrel—though he would not give a price that the cartel is actually targeting.

Saudi Arabia optimistic, but willing to walk

Following Sunday’s announcement form Saudi Arabian Energy Minister Khalid al-Falih that the Oil Kingdom might revert to its previous strategy of letting market forces drive the market’s rebalance, stating, “I don’t think that we have one path only in OPEC meetings, which is cutting production—I think maintaining production at current levels is justifiable, taking into consideration the recovery of consumption and growth in developing markets and the United States.” Headlines ripped that this week’s deal hung by a thread, and a number of analysts downplayed the likelihood that some agreement would be struck, soon after a deal had seemed nearly inevitable just days before.

During the introductory press conference that kicks off the official OPEC ministerial meeting, which was preceded by a highly unusual breakfast meeting in the Park Hyatt hotel, Falih reiterated his willingness to walk away, but struck an optimistic tone.

“A deal is not imperative to the extent that markets will collapse if we don’t (establish one). … We will find out during the meeting if we reach a deal, but the sentiment is optimistic and positive.”

“If we can’t come to agreement, a ‘rolling over’ scenario and waiting for market to recover on its own is not a bad outcome,” he told reporters. “A deal is not imperative to the extent that markets will collapse if we don’t (establish one). … We will find out during the meeting if we reach a deal, but the sentiment is optimistic and positive.”

Falih stated that members were focused on achieving the 32.5 million barrel per day production ceiling agreed to during the extraordinary Algiers meeting in September, even though Saudi Arabia would require to accept a significant burden to achieve that target. “It means we will take a big cut and a big hit from our current production and from our forecast for 2017.” He said, “Libya and Nigeria and formerly Iran needed special considerations. But Iran has now recovered from pre-sanctions levels.”

Importantly, he also noted that if OPEC is successful today in implementing the Algiers agreement, he is confident that non-OPEC “will also take the bid.”

“I’m hoping for 600,000 combined cut from non-OPEC producers, but only if OPEC achieves and agreement first. OPEC must put its money where its mouth is.” Falih said he is in “direct contact” with officials including Russian Energy Minister Alexander Novak, and that from non-OPEC producers there is a “general willingness to offer reductions” but that numbers had not been established.

“Fundamentals are moving in right direction,” he said. “We believe 2017 will see another healthy year of demand, especially from the U.S.” Falih recognized that production has grown from OPEC member states, but argued, “most OPEC growth is behind us.”

Regarding Russia, rumors of a renewed pledge from Moscow to participate have significantly boosted sentiment towards a deal, even though the logistics of implementation remain fuzzy.