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The Doha collapse

Saudi-Iranian rivalry has thwarted an oil-supply deal, just as the price recovery was gathering momentum

Forget the freeze: the Russian effort to cajole Opec’s big producers into even the most benign form of supply-side management to support prices is now over. The collapse of the Doha deal on 17 April will destroy the fragile trust between major producers and could prompt a new wave of supply into a glutted market.

Bullish oil-market sentiment had been building in recent weeks, supporting a price recovery that had taken Brent from under $38 a barrel to almost $45/b. Fifty-dollar oil was in sight: all the Doha delegates needed to do was talk calmly and sprinkle some more dust on the rally.

They failed. The meeting went badly. The Russian energy minister, Alexander Novak, believed he was in Doha to sign an agreement, not debate it. But Saudi Arabia and its Gulf allies changed their position in the morning of the meeting, said Novak, “a rare practice in the context of international meetings”. In fact, Riyadh’s new stance had been pre-ordained. In an interview with Bloomberg before the meeting, deputy crown prince Mohammed bin Salman, now unquestionably ruling Saudi oil policy, said no deal was possible without Iran’s participation.

Traders in Asia sold hard as soon as markets opened following the meeting. WTI and Brent were both down by more than 6% within minutes. An oil-worker strike in Kuwait, which has temporarily reduced production by 1.9m barrels a day, offers a prop, but the shortage is likely to be short-lived. A new supply free-for-all, with big producers maximising exports, is now plausible.

Mohammed bin Salman’s pre-meeting words about Iran didn’t just kill the chances of an agreement, it made the meeting and its ending disorderly – exactly the opposite outcome its organisers and the market sought. The Russian delegation was furious. Social media carried pictures from within the room; the mood didn’t look upbeat. The delegates debated for 13 hours – reports have surfaced of ministers gathering around a laptop to argue over the wording of a statement – and ended with nothing.

Saudi Arabia feared that freezing its own output would only reward its rival Iran, which continues to increase its exports in an effort to reclaim market share lost under sanctions.

Tehran’s and Riyadh’s proxies are battling in Syria and elsewhere in the region, so Mohammed bin Salman decided Saudi Arabia couldn’t cough up market share to a geopolitical rival. But by implicitly deepening the broader conflict into oil the kingdom has at a stroke undermined years of effort by oil minister Ali al-Naimi to depoliticise the kingdom’s oil marketing policy.

Naimi’s power over Saudi oil policy also looks greatly diminished – the young crown prince ensured that by pre-empting the Doha meeting with his red line on Iran. Russia and others trying to deal with the kingdom will henceforth wonder who is really in charge.

The fall-out from the Doha collapse could be troubling for the market and the world economy. Oil-exporter currencies fell quickly after the meeting ended. Venezuela and others desperately needing economic rescue may be brought closer to the edge. They will probably try to resurrect the freeze process in some form. But unless Riyadh eases its stance on Iran – a policy reversal that would lose it credibility – the chances are slim.

Without even a plain-vanilla freeze deal to keep its exports in check, Saudi Arabia could lift output - by allowing, say, Neutral Zone production to resume. Aggressive discounts would be needed to find buyers for yet more crude than the market needs. Russia can be expected to pull out all stops to sustain its already high production levels. Most forecasters expect the market to tighten in the second half of the year – but it won’t if the Doha collapse spurs another jump in supply. Saudi Arabia has revived the industry’s “lower-for-longer” mantra, just as producers thought they saw an end to the slump.

Hopes that the Opec meeting in June might offer another chance to support prices look forlorn. The Doha track already undermined the group’s institutional significance. Now that its lynchpin Saudi Arabia says it is definitively out of the business of supply management the June summit might only showcase, again, Opec’s disunity.

Above all, the Doha collapse proves to non-Opec producers that weak fundamentals aren’t their only problem. Their livelihoods are also now hostage to Riyadh’s politics, its regional rivalry, and Mohammed bin Salman’s new broom.

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