Oil market roller-coaster ride (in the pipeline)
The one certainty about the compromise in Algiers by Opec oil ministers is that it will ensure oil prices will be volatile for the next two months.
The Opec communiqué, released late on Wednesday in Algiers, made it clear that there has been movement by Saudi Arabia and its allies away from their hardline position of the past two years to let the market find its own equilibrium, but there are still many details to be worked out before there is a concrete deal in place.
The main focus of the Opec statement was that the group had agreed in principle to a “production target” of between 32.5 million and 33 million barrels per day, compared with output that was a little over 33.2 million bpd in August and averaged 32.65 million bpd in the first half of the year.
There were no details as to which members would agree to freeze or cut output, but the implication is that it would fall to Saudi Arabia and its allies, as Iran has remained adamant that it will not consider freezing output until it reaches output levels of 4 million bpd, which is where it was before the 2012 nuclear-related sanctions that were lifted at the start of this year.
“We would expect the burden of the cuts to fall on Saudi Arabia and its allies, such as the UAE, Kuwait and Qatar,” said Ed Bell, a commodities analyst at Emirates NBD in Dubai.
That view is supported by the seemingly content Iranian oil minister. “After two-and-a-half years, Opec reached consensus to manage the market,” Bijan Zanganeh said after the meeting.
His Saudi Arabian counterpart, Khaled Al Falih, was more vague, saying Iran, Nigeria and Libya would be allowed to produce “at maximum levels that make sense”.
Among the many questions within Opec itself is whether the target figures already take into account a higher amount from Nigeria and Libya, where production fell sharply over the past year or so because of internal conflict.
“Adjusting for higher Libyan and Nigerian production, we estimate Opec output will still be lower by 400,000 bpd from current levels,” said Amrita Sen, chief oil analyst at Energy Aspects.
“In the best-case scenario, Opec output will fall by 800,000 bpd from current levels, or more should disruptions in Nigeria and Libya worsen compared to August,” she added.
The other major question left unanswered by Opec is what kind of deal it expects from non-Opec producers, particularly Russia, which has been competing hard against Gulf Opec members for market share in China and the rest of Asia.
Russia is this month expected to produce a post-Soviet era record 11.1 million bpd, up a whopping 400,000 bpd from August levels.
The communiqué talked of having “a serious and constructive dialogue with non-member-producing countries, with the objective to stabilise the oil market,” which represents merely a repetition of hope that has gone before.
The “firm and common ground [for] collaborative efforts among [Opec] producers” is diplomatic words that mean there is no deal yet.
Opec has established “high- level committees” and so on to come up with a bargain by the next scheduled ministers’ meeting in Vienna on November 30.
In the meantime, every word by key actors will be scrutinised for signs of progress or lack thereof, which in turn will feed into the market.
After an initial bounce, the reaction has been somewhat muted, with world benchmark North Sea Brent futures rising as high as US$49.09 from the previous day’s close of $48.69, but then settling back to $48.66 as the terms of the deal were absorbed.
“Long-term Brent futures haven’t moved much beyond US$55 a barrel,” Mr Bell pointed out, noting the dilemma for Opec of trying to balance the Saudi argument to let market forces work versus the short-term economic pain that hits some members harder than others: “There is a risk that if some of the highly cash-stressed producers in Opec – Venezuela, for instance – don’t see enough of an improvement in prices they may press for further cuts. This would do substantial damage to Opec’s strategy of securing market share in the long term.”