Eyebrows all over the world were raised when he said, “There is no price war” – after all anyone with even a passing interest in the oil and gas industry over the past 25 months would disagree. And perhaps therein those five little words uttered by Khalid Al-Falih is a revelation of a seminal change in Saudi Arabia’s intent for the upcoming OPEC meeting in Algeria this month, where informal talks on stabilising prices will take place.
Since November 2014, OPEC’s meetings have been dominated by rumours, letters and outright calls in the press by individual members for production freezes to counter the catastrophic drop in oil prices. OPEC, led by Saudi Arabia, waged war on US shale producers in a bid to topple them and instead of reducing production, went all out to flood the market and drown the competition. Instead of the quick death they would have hoped for, it’s been a long, slow and painful struggle, impacting on every oil producing nation in the world. In June 2014 the international benchmark was hitting heights of $115.71 pb. This week oil traded at $43.16pb.
There have been rumours of deals to curb production involving OPEC members and also Russia, but all have come to nowt. The most recent attempt in April, a six hour meeting, collapsed when Iran decided to stay at home. Oman’s Oil Minister Mohammed Al-Rumhy complained to the media outside, “Until this morning we thought there would be a deal. We didn’t know Iran wasn’t coming.”
However we could be arriving at the perfect storm, when events collide to create an opportunity. Things are a little different now for Iran, as Forbes reports; “(It) is now closer to preaching its post sanction output levels of 4m bpd increasing the odds of Iranian participation in Algiers.” It’s also cut prices right back to the bone in order to attain pre-sanction production levels of 4m bpd. It is important to note however, that Iran’s support – in public – for a production freeze will only include its own production when it reached pre-sanctions output of 4m bpd. In July it hit 3.6m bpd.
There is new support from Iraq for a production freeze, although you could be forgiven for getting caught out by that one. After all, on August 23rd Prime Minister Haidar Al-Abadi did tell Reuters that Iraq still hadn’t raised production sufficiently. Who knows what went on between that and the next day, but on the 24th the deputy Oil Minister Fayyad Al-Nima popped up and said Iraq was now in a position to support measures to establish fair crude prices. Al-Abadi has cleared up any confusion by confirming what we all know: “The drop in oil prices is causing volatility and this is harming Iraq because our revenues are based on oil. Our opinion is to freeze output to support prices.”
Iraq wasn’t the only one to change its mind. On the 26th Al-Falih said, “We don’t believe any significant intervention in the market is necessary other than to allow the forces of supply and demand to do the work for us” and was reassured that the “market is moving in the right direction.” (Reuters says, following his comments, “Global marker Brent futures gave back some gains, slipping as much as 35 cents, or 0.7 percent, over 20 minutes, before recovering somewhat.”) Five days later Al-Falih said, “The market is now saturated with stored crude at beyond usual levels and we don’t see in the near future a need for the kingdom to reach its maximum capacity.”
As the saying goes, ‘Fool me once, shame on you. Fool me twice, shame on me’ and for that reason, having been publicly burned by both Russia and Iran on separate occasions, Saudi Arabia will be unwilling to go into any talks, informal or otherwise, looking like it is the one who needs a deal. But the Kingdom knows it can’t go on like this forever. Last year’s all-time high budget deficit of £100bn is not likely to be breached this year (predictions put it at $87bn) but its vast foreign reserves (once as high as $737bn, but recently reported at $555bn) are being relied upon more than ever before and next month it is hoping to raise $10bn through an international bond sale. In an attempt to cut Russia’s ties to China Saudi Aramco cut prices to China. But Russia is not the only force to contend with here – Iran is also eyeing up the Chinese market where it once (pre-sanctions) met 11% of the demand. Reza Yeganehshakib, a geopolitical and energy analyst told Forbes, “Iran would like to take advantage of the forecasted increase of China’s crude demand due to an increase in transportation fuel consumption and its petrochemical industries in the second half of the year.”
So the hot topic in Riyadh will likely be whether it has the appetite to do battle with Iran and Russia in the same way it tried to defeat the US shale producers. The country, no longer the world’s biggest oil producer, knows it is not untouchable, and to preserve the might of OPEC it is ‘treading softly’ as The Telegraph puts it. Will the Algiers meeting bring change? We can but hope.