Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
OPEC's Output Freeze:
What Has Changed Since
Al-Jazeerah, CCUN, August 30, 2016
It's possible that OPEC is crying wolf with hints of an output
freeze next month in Algiers; but it's also possible that they are ramping
up production to take the sting out of a freeze. This is a delicate
balancing act that the Saudis need to play very carefully.
official chatter is that the OPEC meeting in Algeria from September 26 to
28 could conclude with an agreement to freeze production by the member
nations, with even Russia joining forces in a freeze that may prevent
further oil price erosion. But everyone's a bit gun-shy after the false
hopes of the last round in Doha—even if a freeze at levels that existed
then wouldn't have meant much either—and it's hard to blame them. The
question is, how many times can the Saudis cry wolf without forever losing
the ability to leverage this chatter to affect a rise in oil prices?
But lets rewind a bit to the nature of the recent chatter. The Saudi
Energy Minister has indicated that Saudi Arabia, OPEC's largest producer,
is willing to proceed with a production freeze.
"We are, in Saudi
Arabia, watching the market closely, and if there is a need to take any
action to help the market rebalance, then we would, of course in
cooperation with OPEC and major non-OPEC exporters," said Saudi Energy
Minister Khalid Al-Falih, reports
"We are going to have a ministerial meeting of the
International Energy Forum in Algeria next month, and there is an
opportunity for OPEC and major exporting non-OPEC ministers to meet and
discuss the market situation, including any possible action that may be
required to stabilize the market."
The hopes of reaching an
agreement in Doha were scuttled by Saudi Arabia, because it wanted its
arch rival, Iran, to participate in the freeze. Unfortunately for oil
prices, Iran had
made it clear that it would not join any such discussion until they
reached pre-sanction levels of oil production.
changed from Doha to Algeria?
production is close to its
pre-sanction levels, meaning that its first cited prerequisite for any
discussion has now been met—a criteria that was not met at the time of the
Doha meeting. In addition, increasing oil production further by Iran is a
big ask—it would need billions of dollars worth of investments in both
upstream and downstream facilities to make this happen. With oil prices
languishing below $50 a barrel, major oil companies are reluctant to
commit huge sums of money for new oil projects.
are mature, and more than half of its wells have an annual decline rate of
9 percent to 11 percent, according to Michael Cohen, an analyst at
Barclays in New York. Therefore, at their existing production levels, they
need an additional 200,000 to 300,000 barrels a day annually to replace
the shortfall from their aging wells.
Iran needs more money and
investment to continue pumping at the current rate, making it more likely
for Iran to agree to some kind of an arrangement where they continue to
pump oil at a rate close to their target of 4 million barrels a day.
That said, the last thing that Iran wants is to be sidelined, so
Tehran is bound to make its presence felt at the meeting with strong
statements. But at the end of the day, it is unlikely that Iran will
scuttle an agreement where it has everything to gain and nothing to lose.
"There may be a little bit more to it this time. I'm still very
skeptical, but it's just with Iran being where they are production-wise,
they'll be more inclined to eventually go along with a deal," said Again
Capital's John Kilduff, reports
nation underestimated the resilience of the U.S. shale oil drillers when
they declared war on them in 2014. American oil has not only kept
flowing—the shale producers have managed to bring down production costs
considerably. This ability was not anticipated by Saudi Arabia.
Meanwhile, Saudi Arabia has burned more than $175 billion in reserves
since August 2014. The Saudis have introduced austerity measures and plans
to monetize their crown jewel Saudi Aramco to survive the oil downturn.
Nevertheless, things are not going well for this nation, which youth is
struggling to find jobs as shown in the chart below.
A large population of unemployed youths who cannot take care of
their families can sow seeds of frustration, and the Arab Spring will
still be fresh in the memory of the rulers.
Saudi Arabia is
struggling to grow in this oil downturn. Barring the 2009 dip, the current
growth rate of 1.5 percent is the worst in a decade, according to data
If oil prices remain low, the Saudi plan to sell shares in Saudi
Aramco might not fetch them the valuations they expect, and a nation that
cannot provide the most basic of amenities—food for its foreign workers—says
a lot about their financial condition.
Saudi Arabia has seen the
recent slide in crude oil prices towards the $40/barrel mark, which could
have gone deeper without the chatter of a production freeze. And since they
have already cried wolf once in Doha, doing so again in Algiers decrease the
importance of any ‘chatter' leverage they have in the future.
of the nations already onboard
Barring Iran and Saudi Arabia, the
rest of the nations were in agreement about the need to freeze production
From OPEC to Russia, everyone is at record
The oil-producing nations want to ensure that even
if there are talks of a production freeze, they should not feel the pinch.
Hence, even before the meeting, they will try to produce more, rather than
less. The recent ramping up may very well be an indication that a
freeze—although at a level higher than what would have likely come out of
the Doha meeting—may be on the horizon.
The oil markets are so
sensitive that even a statement of agreement by OPEC at the end of the
meeting is enough to send oil prices flying above the resistance level of
$51 a barrel.
What about the shale oil producers?
Though U.S. production is declining and experiencing a flurry of
bankruptcies, the remaining companies are much better positioned to continue
pumping at lower levels to survive the downturn.
Though the risk
remains that the shale oil drillers will come back in full force when oil
prices recover, the risk is worth taking. OPEC and Russia have realized that
any new world order will have to include the shale oil companies. They are a
large enough force not to be neglected or defeated.
With all of this
in mind, an agreement between OPEC and Russia is more feasible in Algiers
than it was in Doha. It might not mean much though, with output levels
soaring ahead of the meeting. A freeze at current levels—or levels reached
by the time of the meeting—won't do much to change the fundamentals, nor is
there any indication that a freeze would have long legs.
Share the link of this article with your facebook friends