Oil price rise as OPEC fails to set output cap

                                                                     Barkindo

Global oil market stabilisation dominated talks at yesterday’s meeting of the Organisation of Petroleum Exporting Countries (OPEC) in Austria. From a synergy between cartel members and non-members, the body believes, oil-producing nations will earn reasonable and sustainable revenue to provide stable, reliable, efficient and economic supply to consuming countries.  Oil industry investors will also have a fair return.

Oil prices rose to $50.04 per barrel yesterday as the Organisation of the Petroleum Exporting Countries (OPEC) ended its meeting without setting a ceiling for crude production.

Market participants had gathered in Vienna, venue of the meeting in Austria for signs of agreement on reviving the group’s collective output quota proposed by Saudi Arabia or the introduction of individual member country quotas suggested by Iran.

But sources within OPEC said the organisation failed to agree on output policy or set a new ceiling.

The market is currently oversupplied by an estimated 1.5-2.0 million barrels per day.

Saudi Arabia promised yesterday not to flood the oil market with extra barrels even as members of the Organisation of Petroleum Exporting Countries (OPEC) failed to agree on output policy, with Iran insisting on the right to raise production steeply.

Tensions between the Sunni-led kingdom and the Shi’ite Islamic Republic have been the highlights of several previous OPEC meetings, including last December’s, when the group failed to agree on a formal output target for the first time in years.

But, tensions, however, were less acute yesterday in Vienna, Austria, where Saudi Arabia’s new Energy Minister, Khalid al-Falih, showed Riyadh wanted to be more conciliatory and his Iranian counterpart, Bijan Zanganeh, kept his criticism of Riyadh to an unusual minimum.

The decision was a softening of Saudi Arabia’s previous stance where it rigorously pumped to defend its share of a market.

In a rare compromise, OPEC also decided unanimously to appoint Nigeria’s Mohammed Barkindo as its new Secretary-General after years of friction over the issue.

Barkindo, a onetime Group Managing Director (GMD), Nigerian National Petroleum Corporation (NNPC), replaces Libya’s Abdalla El-Badri, whose tenure expired since 2012, but stayed on because members of the cartel could not reach a consensus on a successor.

As announced in Vienna, he will assume duty in August and serve for the next three years.

Nigeria’s Minister of State for Petroleum Resources, Dr. Emmanuel Ibe Kachikwu, led the countries team to the meeting, the 169th of such.

Saudi Arabia and its Gulf allies had tried to propose that OPEC set a new collective ceiling in an attempt to repair the group’s waning importance. But yesterday’s meeting ended with no new policy or ceiling amid resistance from Iran.

Despite the setback, Saudi Arabia moved to soothe market fears that failure to reach any deal would prompt OPEC’s largest producer, already pumping near record highs, to raise production further to punish rivals and gain additional market share.

“We will be very gentle in our approach and make sure we don’t shock the market in any way,” al-Falih told reporters.

When asked whether Saudi Arabia could accelerate production, he said: “There is no reason to expect that Saudi Arabia is going to go on a flooding campaign.”

The market has grown increasingly used to OPEC clashes over the past two years as political foes Riyadh and Tehran fight proxy wars in Syria and Yemen.

Between Riyadh and Tehran

Saudi Arabia effectively scuppered plans for a global production freeze – aimed at stabilising oil markets – in April in the Qatari capital of Doha. It said then that it would join the deal, which would also have involved non-OPEC Russia, only if Iran agreed to freeze output.

Tehran argues it should be allowed to raise production to levels seen before the imposition of now-ended Western sanctions over Iran’s nuclear programme.

Zanganeh said Tehran would not support any new collective output ceiling and wanted the debate to focus on individual-country production quotas, effectively abandoned by OPEC years ago.

“Without country quotas, OPEC cannot control anything,” Zanganeh told reporters. He insisted Tehran deserved a quota – based on historic output levels – of 14.5 per cent of OPEC’s overall production.

OPEC is pumping 32.5 million barrels per day (bpd), which would give Iran a quota of 4.7 million bpd – well above its current output of 3.8 million, according to Tehran’s estimates, and 3.5 million, based on market estimates.

Benign deal

At its December 2015 meeting, OPEC effectively allowed its 13 members to pump at will.

As a result, prices crashed to $27 per barrel in January, their lowest in over a decade, but have since recovered to around $50 due to global supply outages.

That OPEC could not agree on a benign deal is a sign that political differences are undermining the organisation, said Gary Ross, founder of Unted States (U.S.)-based PIRA consultancy.

“It is bearish short-term for oil prices. But what is also important is that Saudis are not planning to flood the market,” Ross added.

Zanganeh made a few conciliatory remarks, saying he was happy with the meeting and received no signals from other producers that they planned to increase output.

Amrita Sen of Energy Aspects, who, like Ross, travelled to Vienna to meet OPEC officials, the meeting sent an encouraging signal about the state of the organisation.

“After the Doha debacle, it actually restores market confidence that Saudi Arabia is committed to OPEC. This is a success compared to three days ago when people had been expecting al-Falih to walk out of the OPEC room,” said Sen.

Brent crude oil futures were down 54 cents, or one per cent, at $49.18 a barrel after touching an intra-day low of $48.84.

U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1.2 per cent, to $48.41, after tumbling more than $1 earlier.

Some traders said crude prices were partly pressured by the dollar’s recovery, following comment by European Central Bank President Mario Draghi that was considered bearish for the euro.

The early arrival of al-Falih in Vienna for yesterday’s meeting confirmed he takes the organisation seriously despite fears among fellow members that Riyadh no longer has keen interest in having OPEC set output.

The Saudis minister was the first to arrive for the meeting.

“There could be shorter-term situations in which, in our view, OPEC might intervene and yet other situations — such as long-term growth of marginal barrels — in which case it should not,” al-Falih told Argus Media ahead of the meeting.