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Kachikwu’s shuttle diplomacy may pay off, Russia, Saudi Arabia agree to freeze oil output

By on February 18, 2016

The push by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, to get major oil producers such as Saudi Arabia and Russia to agree to production cuts in order to shore up oil prices, may pay off following news yesterday that the world’s two largest crude producers have agreed not to increase oil output.
Kachikwu, in the last few weeks has been trying to convince the Organisation of Petroleum Exporting Countries (OPEC) to convene an emergency meeting before the cartel’s scheduled meeting on June 2, 2016, but he was resisted by Gulf producers led by Saudi Arabia, which insisted on retaining market share in the global oil market.
He also sparred with the chairman of Saudi Arabian Oil Company (Saudi Aramco), Mr. Khalid Al-Falih, at the last World Economic Forum in Davos, Switzerland, over the kingdom’s reluctance to agree to an emergency meeting.
Saudi Arabia had maintained that it would not reverse course except non-OPEC nations play their part in production cuts.
However, the world’s two biggest crude producers said yesterday after a meeting in Doha, Qatar, that they would not increase oil output. Along with Russia and Saudi Arabia, Qatar and Venezuela have agreed to freeze production at January levels, according to Russia’s Energy Ministry.
“A deal will be reached if other producers join the initiative,” said Russian Energy Minister, Mr. Aleksandr Novak, after the meeting with his Saudi counterpart.
Saudi Oil Minister Ali Al-Naimi said freezing output at January levels would be “adequate” however the country still wants to meet the demand of its customers.
Saudi Arabia has insisted it won’t cut production unless major producers outside the cartel cooperate. Russian Energy Minister has said cooperation is possible if other producers joined in.
However, the CEO of Russia’s biggest oil producer Rosneft Igor Sechin said last week that his company would defend traditional markets and raised doubts about production cuts. “Tell me who is supposed to cut? Will Saudi Arabia cut production? Will Iran cut production? Will Mexico cut production? Will Brazil cut production? Who is going to cut?” asked Sechin.
“We are working on preserving our traditional markets and we will supply those markets with oil in a competitive battle,” he added.
According to AFP, oil prices jumped yesterday to $35.55 per barrel after the news about the meeting but later fell to trade near $33 on concerns that Iran may reject the deal and that even if Tehran agreed it would not help ease the growing global glut.
“The news has actually disappointed the market slightly because some people had hoped to see a cut rather than a production freeze,” City Index analyst Fawad Razaqzada told AFP. This prompted a “lukewarm response” from the oil market, analysts at Capital Economics noted. “For the deal to have any teeth, Saudi Arabia in particular needs to be willing to cut output, not least to offset the increased supply still to come from Iran,” they said.
Iran, Saudi Arabia’s regional arch rival, has pledged to steeply increase output in the coming months as it looks to regain market share lost after years of international sanctions, which were lifted in January following a deal with world powers over its nuclear programme.
“Our situation is totally different to those countries that have been producing at high levels for the past few years,” a senior source familiar with Iran’s thinking told Reuters.
Iranian Oil Minister Bijan Zanganeh also indicated Tehran would not agree to freezing its output at January levels, saying the country would not give up its appropriate share of the global oil market.
The fact that output from OPEC kingpin Saudi Arabia and non-OPEC Russia – the world’s two top producers and exporters – is near record highs complicates any agreement since Iran is producing at least 1 million barrels per day below its capacity and pre-sanctions levels.
However, two non-Iranian sources close to OPEC discussions told Reuters that Iran might be offered special terms as part of the output freeze deal. “Iran is returning to the market and needs to be given a special chance but it also needs to make some calculations,” said one source.
Russian Deputy Prime Minister Arkady Dvorkovich said freezing output was not a problem for his country as he anyway expected its production to be flat this year versus 2015.
An Iraqi oil ministry source said Baghdad was also happy to freeze production if all parties agreed.
“The agreement (if successful) should support oil prices but there are reasons to be cautious. Not all OPEC members have signed up to the deal – notably Iran and Iraq. History would also suggest that compliance may be an issue,” said Capital Economics’ analyst Jason Tuvey.
OPEC has been quarrelling for decades over output levels and Russia, which last agreed to cooperate with OPEC back in 2001, never followed through on its pledge and raised exports instead.
Also complicating any potential agreement is the geo-political rivalry in the Middle East between Sunni Muslim power Saudi Arabia and Shi’ite Iran. Saudi Arabia and its Gulf allies are fighting proxy conflicts with Russia and Iran in the region, including in Syria and Yemen.
In Syria’s five-year-old civil war, Riyadh politically and financially backs some rebel groups battling President Bashar al-Assad’s government, which has gained the upper hand with the help of Russian warplanes and Iranian-backed Shi’ite militias.
The Doha meeting came after more than 18 months of declining oil prices, knocking crude below $30 a barrel for the first time in over a decade from as high as $115 a barrel in mid-2014.
The slump was triggered by booming US shale oil output and a decision by Saudi Arabia and its OPEC Gulf allies to raise production to fight for market share and drive higher-cost production out of the market.
But although US output has begun to decline and global demand has been robust it has still not been enough to offset booming global production which has led to oil stockpiles rising to record levels.
Saudi Arabia has long insisted it would reduce supply only if other OPEC and non-OPEC members agreed, but Russia – the world’s biggest oil producer and No.2 exporter – has said it would not join in as its Siberian fields were different from those of OPEC.
The mood began to change in January as oil prices fell below $30 per barrel.
While Venezuela has been the hardest-hit producer, current oil prices are a fraction of what Russia needs to balance its budget as it heads towards parliamentary elections this year. Saudi finances are also suffering badly, running a $98 billion budget deficit last year, which it seeks to trim this year.
But while talking about potential cooperation with OPEC, Russia raised its output to a new record high in January.
“Even if they do freeze production at January levels, you have still got global inventory builds which are going to weigh on prices. So whilst it’s a positive step, I don’t think it will have a huge impact on supply/demand balances, simply because we were oversupplied in January anyway,” said Energy Aspects’ analyst Dominic Haywood.
OPEC members Venezuela and Nigeria had called for a meeting to discuss crude prices that have fallen over 70 per cent since 2014. Plunging prices finally forced producers unwilling to cut production to the negotiating table.
Commenting on the Doha meeting yesterday, Kachikwu informed THISDAY that he was excited but remained cautiously optimistic, adding that it was a step in the right direction.
“I am excited yet cautiously optimistic that we are beginning to converge on this issue because at current prices, it hurts all of us,” he said.
He revealed that he will be in Qatar and Saudi Arabia this weekend, ahead of President Muhammadu Buhari’s visit to both countries next week, to meet with his counterparts in the oil sector to ensure the “momentum is sustained”.
On concerns over loss of market share, Kachikwu said: “We should be focused more on the value of the product than on market share, because if the value drops to ridiculously low levels there will no market to protect.”

 

[ThisDay]