Opec’s inertia: still no freeze, still no quota
Despite some initial talk that a deal to freeze the group’s production may be reached, Iran and higher oil prices have proved stumbling blocks
OPEC surprised few in Vienna, when it failed to agree on either an oil-output freeze or a new production ceiling.
That's despite Saudi Arabia suggesting in the days prior to the meeting on 2 June that reaching a deal to freeze the group’s output was within its grasp.
Khalid Al-Falih – the Kingdom’s oil minister – told journalists that its priority was “for the long-term stability of the market'. It was "time to steward" the market towards rebalancing, he said.
But discord among Opec member states was clear from the outset.
UAE oil minister Suhail Mohamed Faraj Al Mazrouei said reintroducing a group-wide production ceiling would need unanimous agreement.
Until December Opec had an agreed oil-output ceiling of 30 million barrels a day. This had been in place since December 2011.
At the previous meeting in December the group failed to agree on a new production ceiling because Iran wouldn’t agree to limit its output.
Since then, Opec’s crude production has been steadily rising.
In April the group’s output surged by 300,000 b/d, reaching 32.76m b/d, according to the International Energy Agency.
Emmanuel Ibe Kachikwu, Nigeria’s oil minister, said support for reinstating a group-wide production ceiling was lacklustre but insisted “everyone is open-minded”.
“There are differences of opinions but unlike previous meetings you have now a collective will to act and redefine balance,” he said ahead of the meeting. “Most ministers see the pros and cons of both sides and are willing to act in any position that is supportive (of prices).”
But by mid-afternoon on 2 June, it became clear than an agreement to freeze output had not been reached.
As was the case with the failed Doha talks in April Iran proved a major stumbling block.
The Islamic republic has been very clear about its intentions to ramp up both its oil production and its exports and it is on track to reach pre-sanctions oil export levels this month.
Bijan Namdar Zanganeh, the country’s oil minister, said he would not support reinstating an Opec-wide output ceiling.
Iranian crude exports reached 2.023m b/d by the beginning of June, up from around 1.1m/d when it emerged from sanctions in January. The country’s total oil production is now around 3.8m b/d, Zanganeh said, up from 2.99m b/d in January.
Iran has vowed to reach crude output of 4m b/d as soon as possible, putting it within 100,000 b/d of its pre-sanctions 2011 level. Over the longer-term, Iran is targeting production of 4.8m b/d within the next five years.
Sources close to state company Nioc say that the country’s international crude and condensate exports will reach a pre-sanctions level of around 2.5m b/d this month. Condensates will account for about 0.5m b/d of this and the rest will be crude oil, according to Iman Nasseri, an analyst at Facts Global Energy.
Stronger Brent prices have also diminished any incentive for Opec to freeze, let alone reduce its production.
Although Brent prices fell by around $1.50/b immediately after the meeting, down to around $48.40/b, the drop was short-lived. The benchmark later rose above $50/b again, bolstered by news that US crude stocks had drawn.
Brent prices have risen by more than $20/b since the start of the year.
Bolstered by a series of unplanned production outages in Canada, northern Iraq, Venezuela and Nigeria Brent climbed to a seven-month high of over $50/b at the end of May. Futures prices have remained in a tight range since.
The Opec Reference Basket – a blend of 13 crudes produced by the group’s members – reached $45/b at the beginning of June. That’s up from just $22/b in mid-January.
Despite no production freeze or ceiling being agreed upon, the UAE’s Al-Mazrouei said that the meeting was "excellent" and that there was "full alignment between the members".
Qatari oil minister, Mohammed Saleh al-Sada, added that the worst is over.
"Over the last few Opec meetings the (oil-price) trend was downward," Al-Sada told journalists after the meeting. "And this is the first meeting…where we’ve seen vividly that the trend (upwards) has started."
It is now highly unlikely that the group will see the need to cut or freeze production going forward.
The group estimates that global oil demand will rise by 1.2m b/d this year, while non-Opec production will fall by 0.74m b/d, it says.
Many analysts expect Brent prices to rise in the second half of this year but they are also anticipating increased volatility.
Citibank said at the end of May that increased instability in petro-states, Opec’s diminishing ability to balance the market and the rise of the US as a major swing producer will all push oil price volatility higher from now on.
The increasing influence of hedge funds and other managed money over crude prices - rather than actual supply-demand fundamentals - will also drive volatility higher, the bank said.
After last year’s 1.5m b/d global oversupply of crude, drawing stocks should balance the market by the middle of this year, Citibank said. The market will then be in deficit – where demand exceeds supply – for most of the next six quarters.
The Opec meeting wasn’t completely without action. From July Gabon – an Opec member from 1975-1994 – will be readmitted.
A new Opec Secretary General was also appointed. Nigeria’s Mohammed Barkindo – a former managing director of the country’s state-run NNPC – will replace Libya’s Abdalla Salem el-Badri for a three-year term.
But is this the end of Opec’s ability to influence oil markets as some critics, such as Igor Sechin, have suggested? El-Badri insists it isn’t.
“I’ve heard comments maybe five or six times in my career that Opec is dead,” he said after the meeting. “Opec is alive and it will continue to be a very important part of the world economy.”