After all these long months of posturing and public vows, the flushing out of positions and back channel negotiations, the efforts to underpin a higher equilibrium in oil prices has come down to this Sunday’s meeting in Doha.
*** We still expect an agreement to freeze oil output at existing levels among the 18 attending OPEC and non-OPEC oil producers by the end of the Doha meeting. But we now believe it will be a highly contentious meeting, with a higher risk the deal could unravel than we previously believed. ***
*** We understand that Saudi Arabia, angry that Iran is sending its OPEC Governor Hossein Kazempour Ardebili rather than its oil minister Bijan Zanganeh, may go into the Doha meeting hardening its negotiating stance that Iran must agree to fully participate in the freeze “at some point.” ***
*** Iran is still likely to be exempted from an immediate freeze participation, but as a face-saving compromise, a senior level delegation, probably led by Russia, may be created with a mandate to follow up on the Doha agreement to lock down an Iranian commitment on its oil output. ***
Riyadh’s Hard-line Stance
We have understood since the early days of the negotiations building towards the oil output freeze that both Riyadh and Moscow were willing to exempt Tehran, albeit on the condition the Iranians commit to a credible, staggered increase in output this year to minimize price dislocations (SGH 2/16/16, “Oil: Another Step Towards Output Deal”).
But the Saudis now seem likely to harden up their demands on Iran, which will make for a highly contentious meeting, whose outcome will be hard to discern in advance. So we are now elevating the risks around the outcome of the meeting.
The concern is that an exemption too freely given to Tehran will lead to other oil producers demanding exemptions or feeling free to ignore their output ceilings if they can manage to find customers and increase their crude exports.
More to the point perhaps, it is understood the Saudis feel the Iranians are snubbing them in sending a lower level official to Doha and making a high profile point of it. It mean Saudi oil minister Ali al-Naimi will be going into the Doha meetings with an opening Saudi position that it will be wholly committed to the oil output freeze but only if all the major oil producing countries participate, including Iran.
Deputy Crown Prince Mohammed bin Salman made the exact point in remarks to Bloomberg several weeks ago. But the Saudis never publically took the stance any further, after it triggered an immediate fall in oil prices, which then within days brought down the Saudi and Gulf stock markets.
For its part, in only sending the lower ranking OPEC Governor, Tehran is very publically making a political point it is attending Doha to encourage as an observer, and not as a participant to a freeze, at least not to an immediate freeze.
A “Trust-building” First Step
While a freeze will have a negligible impact on the actual amount of crude coming out of the market, it has always been intended as a crucial “trust-building” first step among the oil producers to a much more difficult second step to negotiate an outright cut in the collective output that will probably be necessary before year-end.
The beauty of the efforts to get to a high profile freeze in crude oil output at “existing” levels is that just about every participant is already at or near their maximum output. That applies to Russia and Iraq, which face major constraints on higher production for any meaningful length of time without substantial investments and major maintenance programs.
That same restraint applies to Iran. Iran’s oil infrastructure is in serious need of investment and repair, and for all its assertions of already increasing output by some 900,000 since the end of sanctions, its actual increase in crude exports are probably no more than 250,000 bpd and are unlikely to reach north of 400,000 before 2017.
In the meantime, the bet is that the freeze will underpin a more bullish market sentiment until seasonal factors and the absence of a major economic downturn in China or the US tighten up demand. On that front, the heavy hand of the discussions in Doha will be as much on messaging discipline than anything like enforcement mechanisms, which are near impossible anyway.
A Possible Face-Saving Compromise
One outcome that may emerge to ensure an agreement holds is to adopt a two-phase process for the output freeze.
First, the 18 countries attending, including Saudi Arabia, agree to an immediate implementation of the output freeze. That would be followed with a face-saving compromise crafted as a second phase to the freeze in a high level delegation, probably led by the Russians, meeting with the Iranians soon after Doha to follow through on details to firm up an Iranian commitment.
But that deal has not yet been made, and will need to be hammered out over the weekend.