Confidence building or confidence trick?

Yesterday’s Doha dealings set in motion a process that could lead to confidence-building measures that might open the way for an agreement on production cuts somewhere down the line. In March, a clutch of major producers would promise not to exceed their inflated January output levels. If the promise was kept and the fundamentals required, there might then be cuts, no earlier than the June Opec meeting. No wonder a futures market carried away by newswire headlines fell back sharply on the actuality.

The Saudis present it like this: “Let us freeze first and see if there is a will among everybody to co-operate in such a freeze. Let us see the effect of that freeze. If it is sufficient to create a better psyche for the market, and the market stabilises and improves, fine. If not, at least we have a good level of trust among us.” 

Venezuela’s oil minister Eulogio Del Pino set his sights low too: “What we are seeking is that during the next quarter, when demand will still be low, we might achieve a price that allows producing countries to maintain investment, so in the summer, which is the period of highest demand, we have a level of supply that allows us to maintain market stability.”

Heaven knows, there’s plenty of confidence that needs to be built, between the countries that met in Doha yesterday — Opec’s Saudi Arabia, Venezuela, and Qatar, and non-Opec Russia — and between them and other Opec members, and between any who sign up to a pact and the market. Cynics will look at the Doha deal as a confidence trick, an unspoken agreement to propose just enough to divert the blame for low prices from their doorsteps.

So what are the loci of mistrust?

  • An attempt to get Iran and Saudi Arabia to agree on the time of day would be difficult now. For years, the countries’ respective oil ministers maintained business-like relationships but that is under severe strain, undermined by the turmoil in Iraq, Syria, Yemen, and Bahrain that sees the two governments backing different horses. This growing hostility seeps into Opec politics too as Tehran positions itself as an alternative centre of power to Riyadh, which it accuses of seizing its market share and undermining prices. Iran insists on its right to regain the market share it lost during sanctions but has said in the past that it would consider cutting output, alongside everyone else, once it had regained that base. That offers wiggle room in negotiations but only if Saudi Arabia wants to negotiate.
  • And so does today’s polite public response from Iranian oil minister Bijan Namdar Zanganeh, that Tehran had been informed of the Doha talks and that it welcomed Opec co-operation with non-Opec, with no mention of Iranian production plans. But only if Saudi Arabia wants to negotiate. The suspicion is that it does not, that it hoped Zanganeh would angrily reject the initial Doha proposals, casting Iran as a pantomime villain that espoused producer co-operation only to strangle it at birth. In fact, Tehran treated the visit as an opening gambit.
  • Saudi Arabia still smarts at Russia’s duplicity in 2002 when it failed to cut output as promised. And the two are now contesting each other’s share in key markets — Russia pumping ESPO Blend crude to northeast Asia and Saudi Arabia making forays into the Baltic. And Russian deputy prime minister Arkady Dvorkovich’s comment yesterday that all forecasts show Russia’s output staying flat and “therefore, for us it was not very difficult to take on such an obligation” to freeze production at January levels hardly showed commitment to the cause. Distrust of Moscow as much as distrust of fellow Opec members is why the proposals specify use of secondary sources to verify output.
  • Venezuela says it assembled a group of six Opec members that favoured an emergency meeting of ministers that would challenge the market share over prices strategy. That left it just one short of the majority it technically needed to force a meeting. Regardless of whether they would ever “vote”, the rest of Opec knew that a meeting without Riyadh’s blessing could not achieve a change of policy. And the push for an emergency meeting exposes the split within Opec between a clutch of well-resourced, low-cost Arab producers in the Mideast Gulf, with healthy financial reserves, and everyone else. The Saudi riposte that the likes of Nigeria or Venezuela should have shown greater fiscal sobriety in the past cuts little ice in countries where a breadline income is something the populace aspires to. The meeting in Doha allows Riyadh to say it has listened and Caracas to say it has championed change.
  • If — and it is an if — the aim of Doha and what follows is to provide some medium-term support for prices, the process has to win the confidence of the market. A freeze at January output levels might put a floor under the market but it sure isn’t going to boost prices for the simple reason that it implies a continuing stockbuild. It holds permitted output at exceptionally high levels, even without the inevitable build-up of Iranian exports. Russia can hardly produce more than it is now. Iraqi production will struggle this year as will Kuwait’s. Saudi Arabia is pumping close to historic highs. Nigeria’s January output was a recent high. And the list goes on. The market knows that freezing output at record high levels is a strange way to curb oversupply.

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