September 28, 2016

Opec ministers are holding an informal meeting in Algiers on Wednesday in an effort to accelerate the end of the two-year glut.

While Saudi Arabia cautioned on Tuesday that it does not expect a deal from what was billed as informal “consultations”, Khalid al-Falih, the energy minister, has given an insight to its thinking.

Will a deal come in November?

For most of the year the 14-strong production cartel has been bouncing around the idea of a production freeze in which members mop up the glut without sacrificing too much market share.

A proposal along these lines was scuttled in April. Then, though, Iran had been producing for only three months after the end of western sanctions and was in no mood for a deal.

Mr Falih said on Wednesday the gap between producers is narrowing, giving the strongest indication yet a deal could be achieved at Opec’s next official meeting in Vienna at the end of November. This comes after Iran’s production has recovered to 3.6m-3.8m barrels per day — close to the 4m level it wanted before signing up.

Obstacles remain

Iran now says it wants not just production of 4m b/d or higher but to achieve 13 per cent of the group’s total output which it says is consistent with pre-sanctions levels. Crucially, however, Mr Falih has conceded Iran is a special case — alongside Libya and Nigeria — which have also lost output because of violence in their countries.

“Three countries that had special conditions — namely Libya, Nigeria and Iran — that have been constrained for their own respective reasons will be permitted according to the terms of reference to produce at maximum levels that make sense and generally it would be the levels they have achieved recently,” he said on Tuesday.

That provides some wriggle room should Saudi Arabia and Iran, which are on opposite sides of proxy wars in Syria and Yemen, be able to put their differences to one side.

No pass for Iraq

Notable by its absence from the Saudi’s “special three” is Iraq, which had been largely exempt from old Opec quotas because of its history of war and sanctions. However, in recent years it has re-emerged as the second-largest producer in Opec, its output jumping by more than 1m b/d to 4.35m b/d between 2014 and 2016.

That could prove a sticking point. Part of the surge in output has come from Iraq’s semi-autonomous Kurdish north, where independent exports have become a symbol of its national identity. The Kurds are unlikely to agree to a curb even if Baghdad is prepared to.

The big investment worry

Today’s Opec gathering is on the sidelines of the International Energy Forum, a broader meeting of producers and consumers. So it is perhaps not surprising that every country is keen to emphasise concern about the large drop in investment prompted by the price rout.

Mr Falih said the anxiety, which some fear will trigger a supply shortage, was larger than the short-term aim of lifting revenues through a higher price. “If we under-plan, the world would pay an enormous price in terms of oil supply shortages that would lead to certain price spikes,” he said.

That may raise eyebrows among some motorists, but he’s not alone in highlighting the risk. Fatih Birol, the head of the International Energy Agency, the watchdog for the Organisation for Economic Co-operation and Development, warned this week that his biggest worry is that “investments are falling substantially. This could have major implications for oil supply security in the years to come.”

What about Russia’s role?

Russia, the largest exporter outside the cartel, says it will join a freeze if Opec can agree one. Alexander Novak, energy minister, said on Tuesday Moscow would be “ready to contribute”, adding that “everyone is in favour of propping up the market”.

Many will want to see Russia match words with actions. Its output hit a post-Soviet high this month of almost 11m b/d, raising questions over Mr Novak’s assertion that the country’s policy is to keep output flat.

What sort of a freeze

When is a freeze not a freeze? Well, when it amounts to a cut. Saudi Arabia says a number of proposals are on the table; if any prevail they will have different implications for ending the glut.

If members agree the majority should return to the level they were producing in January that would be a sizeable cut of almost 1m b/d, as production has risen over the summer.

However, a simple freeze at current levels could, conversely, crystallise output at a near record level and may not do much to cut into the surplus until well into next year.

Some traders doubt a real cut well emerge, some believing the cartel is trying to buy time as the market rebalances. It is a view Mr Falih might not endorse but he’s certainly more bullish than some.

“The market is healthy. The worst of the downturn is definitely behind us. Supply and demand have converged,” he said. “Inventories have started to draw down. Prices are fluctuating more than we’d like but it’s within a relatively narrow range.”

Additional reporting by Neil Hume

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