Oil: Doha Collapse

Published on April 17, 2016

Right up to the final moments of the long oil producers meeting in Doha today, most of the oil officials at the Sheraton were still expecting Saudi oil minister Ali al-Naimi to relent, and agree to a watered down draft agreement without Iran’s sign-off. Instead, al-Naimi said nothing, and the deal collapsed in its entirety, with the hapless Qataris left to face the media to put on a brave face about a follow through review of market conditions for the OPEC June meeting.

They probably won’t need to wait that long for the market verdict.

*** The uncompromising Saudi demands there could be no deal to freeze oil output unless Iran fully agreed to the terms — even though no Iranians were at the meeting today — was at the insistence of Deputy Crown Prince Mohammed bin Salman. It left Saudi Oil Minister al-Naimi little to no room to negotiate the compromise that was being crafted through the day. In other words, the oil freeze — largely engineered by the Saudis and Russians and formalized by al-Naimi and Russian energy minister Alexander Novak in February, was effectively doomed from the very start. ***

*** We understand the reasons for the Deputy Crown Prince’s reversal and hard line in the Saudi position were threefold: first, he was said to be upset that too much benefit would be accruing to the Iranians without their putting in a minimum of sacrifice by at least committing to a scheduled, staggered increase in output. He also worried oil prices might rise too high, too quickly, boosting Saudi revenues but potentially also undercutting the political support for his ambitious domestic economic reforms. ***

*** Above all, he apparently felt personally insulted by the Iranian refusal to send Oil Minister Bijan Namdar Zangeneh to Doha, (SGH 4/15/16, “Oil: A Contentious Doha Meeting”), an insult then compounded by Iran’s refusal to even send their OPEC Governor. The Kingdom, the Deputy Crown Prince threatened in an interview with Bloomberg before the weekend, could immediately increase its output by more than a million barrels and another million to 12.5 million within six to nine months “if we wanted to.” The Saudis are now asserting they can match the Iranian crude oil export increases “barrel for barrel” at whatever price is necessary. ***

Self-inflicted Damage

The damage of the Saudi position and the collapse of the oil output freeze is hard to determine so soon after the collapse of the Doha meeting. The fall in oil prices may be softened somewhat by the Kuwaiti oil workers strike, which may take over a million barrels temporarily out of the market.

But the damage to Saudi Arabia itself may be felt on several fronts, most immediately in another sharp fall in the Tadawul, the Saudi stock market, which fell by more than 1% Sunday on initial headlines a Doha agreement may come up short. Only sustained government interventions, usually taken by the Public Investment Fund that reports to the Deputy Crown Prince, is likely to prevent a sustained fall in Saudi share prices.

A sustained fall in oil prices and the Tadawul would also overshadow Deputy Crown Prince Mohammed’s intended launch on April 25 of his “National Transformation Plan,” the extremely aggressive economic reform program he has drawn up with a small circle of technocratic advisors that is almost certain to meet considerable political resistance among deeply entrenched interests in the Kingdom.

Perhaps more damaging to the Kingdom’s interests will be an enormous loss of confidence and trust in Saudi diplomacy. OPEC will have a major effort to repair the damage by its June meeting, for one. And a year’s worth of diplomatic outreach to Moscow could unravel, further delaying a planned visit by Saudi King Salman, the Deputy Crown Prince’s father, to Moscow. Likewise, an eye will have to be kept on developments in Syria.

And the Kingdom’s Gulf Cooperation Council allies like Kuwait and especially Qatar are said to be shocked by the Saudi stance, which may linger through next week’s scheduled GCC meeting in Riyadh — and which President Obama is supposed to be attending. A collapse in oil prices and any renewed damage it might do to the US shale industry is unlikely to go down well with the visiting US President.

In the wake of the collapse of the Doha meeting, we would not rule out a move by Riyadh within the next few days to find a way to undo some of the damage done by either the Deputy Crown Prince himself, or more likely, other senior Al Saud princes.

With that in mind, any political blowback against the Deputy Crown Prince in a further fall in the stock market, capital flight due to a loss of investor confidence, or public resistance to economic reforms should be monitored closely.

Just in the last few days, signs of public discontent over the elimination of government water subsidies surfaced in complaints to the Majlis Shura, the consultative body to the government. 

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