On Nov 30 last year, the Organisation of Petroleum Exporting Countries (Opec) and its allies led by Russia confounded pundits by opting to reduce output by 1.2 million barrels a day (bpd) to 32.5m bpd. The decision, the first since 2008, proved many wrong and aided the crude markets to climb out of the abyss.
The decision was the result of back door energy diplomacy — and at the highest level. The direct involvement of President Vladimir Putin helped overcome the disagreements between Opec’s three largest producers — Saudi Arabia, Iran and Iraq.
This coming Thursday, on November 30 again, Opec ministers are sitting down again in Vienna to have a look at the overall report card and take a decision on their next move.
Markets are focused on its outcome. Until a week or two back, all seemed set. Opec and its allies led by Russia were almost certain to roll over the deal — apparently for a year. Things, however, have taken a turn for worst over the last few days. Uncertainty is creeping up. The Iranian oil minister Bijan Namdar Zanganeh also seems in agreement. Last week he said that (though) most members want it so, the outcome is far from clear.
For the first time now, the Gulf Cooperation Council (GCC) Arab members within Opec are also not united. As per the existing tradition, Gulf Arab Opec members used to speak with one voice at past ministerials. Prior to such meetings, GCC ministers used to meet behind the doors to coordinate their stance on issues.
Courtesy the ongoing conflict between Qatar and the Saudi-led group within the GCC, the effort to coordinate positions within the GCC oil producers is missing and is dampening some moods.
“We used to have a WhatsApp group for all ministers and delegates from the Gulf. It used to be a very busy chatroom. Now it’s dead,” Reuters quoted a senior Opec source as saying. Four other sources expressed similar views, underlining there has been no official contact on oil policy within the GCC.
Interestingly, as Opec president in 2016, Qatar was instrumental in bringing together oil producers into the supply-reduction deal. Now Riyadh and Abu Dhabi are not even on talking terms with Doha. This makes the coordination effort within the GCC virtually impossible.
Mixed signals from Moscow also are creating confusion. The very idea of extending the output for a year was initially supported by President Putin. But now Moscow seems wavering. Signals coming from Russia are mixed — to say the least.
The production cuts have hurt Russia’s economic growth in October, Economy Minister Maxim Oreshkin said last Thursday in the first negative comment about the output cut pact from a high-ranking Russian official.
With oil prices in the $60-65 range, there is growing chatter that Russia might walk away from the deal, preferring instead to delay the announcement of the decision until the trends are clearer.
Russian Energy Minister Alexander Novak too underlined last Monday his country would determine its position on extending the oil pact later in November. Russian producers have reportedly also been resisting extension. Many see the effort to cut output as subsidising higher-cost producers.
US growing output is a cause for concern too. With Brent crude futures climbing above $60 a barrel for the first time since mid-2015, some believe Russia would be unlikely to support a deal extension for fear the spike would be followed by a damaging fall.
“Moscow has had to deal with the economic and social consequences of two recent oil price collapses, in 2008-09 and from 2014,” Chris Weafer, a senior partner at Moscow-based Macro-Advisory strategy firm, said in a note. There is also a growing feeling that sustained higher oil prices would give a fillip to the US shale output too, at the expense of traditional crude producers.
According to the Energy Information Administration, US oil production rose to nearly 9.65m bpd in the first full week of November. That’s a multi-year high, but what’s even more remarkable is how elastic shale production has proven to be: it’s risen nearly 15 per cent since a mid-2016 low.
The issue at hand in Vienna is not necessarily the extension of the deal. And although, it could be professionally hazardous to project, yet, that seems imminent. The real issue is — when to announce and for how long?