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What’s next for OPEC after Doha?

The next OPEC meeting will be in June and it is hard to imagine that the Saudis and Iranians will succeed to reach an agreement.

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The last thing you want is people openly asking what the point of you is.

But that’s exactly what OPEC’s hearing now, after Sunday’s epic #fail. As CBC.ca puts it, “It’s difficult to see what purpose the once-mighty OPEC serves following Sunday’s spectacular flop of much-anticipated talks to freeze oil production and drive up prices.”

The day after the members and non-members stalked out of the room in Doha, global oil prices slumped. Brent crude had been as high as almost $45 pb last week but fell to under $41pb and some are contemplating a further $10pb drop. However while that shocker was reported by CNBC it said in the next breath that they expect it “to recover to $55 pb in 12 months as the oversupply of oil dissipates towards the end of this year.”

That of course remains dependant on one small thing. Namely producers reducing production. The thing that they couldn’t agree on just a few days ago. The latest figures on output suggests that Iranian exports are sitting at 600,000 bpd and Iraqi at 400,000 bpd higher than in March. Prince Mohammed Bin Salman added his two cents even before the meeting on Sunday – before Iran decided not to attend – helpfully boasting (or warning) the kingdom could hike production to 11.5m bpd “if there is a demand.”

The most logical step OPEC could have taken was to freeze output. Prices have been falling since June 2014, not aided by repeated refusals by OPEC to even seriously consider a production cap. The only proactive thing to come from the world’s oil kingpins was an increase in production. The market was buoyed before this weekend, thinking it was nigh impossible for the status quo to remain. But remain it did.

Now instead of appearing to be in control of the situation OPEC looks incompetent and confused. Is change in the air? Brian Stewart quoted Jim Burkhard, a market analyst who quipped as the talks went down (literally) in Doha. “This is the new world of oil. The oil market is a reflection of the world. Power is more decentralised.”

The issue is that within OPEC and non-OPEC, there appears to be no love lost, not an ounce of trust nor even honour amongst .. friends. Saudi Arabia regularly accuses Iran of having oil policies “not solely driven by economic factors like other rational state actors but by geopolitical parameters as well as Tehran’s regional hegemonic and ideological ambitions.” Iran – to give it credit – never intimated that it would take part in any voluntary production rollback, arguing the international sanctions had just been removed. Its OPEC envoy Mehdi Asalil described the current situation as illogical – “When Iran was under sanctions, some countries raised their output and they caused the drop in oil prices. How can they expect Iran to co-operate now and pay the price?” Russia – the most unlikely of brides in this relationship – has a reliably unreliable reputation – as Julian Jessop from Capital Economics pointed out ahead of the Doha talks, “The success of the deal will depend on Russia playing its full part. The track record here is not good – Moscow reportedly reneged on a similar deal in 2001.”

“If this is the starting shot of a new price war then we will not get the inventory draw we were projecting this summer and we will have building inventory in the fall instead and then that will invite the risk of new price lows,” warned Credit Suisse’s global energy economist Jan Stuart.

The kingdom played this game against the US last year, and it backfired. In the process it caused severe hurt to the majority of its OPEC-members as well as some self-inflicted wounds. This may be a case of ideology trumping rationale or it could be the beginning of the end as Saudi Arabia considers the benefits of throwing off the weight of responsibility of leadership and going for an all-out market war.

Had the choice lain solely in the hands of Ali al-Naimi, the kingdom’s veteran oil minister, a deal would probably have been done. But his younger colleague Prince Mohammed thwarted it. At 30 years of age, he has more time on his hands and energy to go into a long battle. NYtimes.com say his comments on Friday suggested “the current standoff between Saudi Arabia and Iran could last for several more months, posing renewed uncertainty on the direction of energy markets.” With a reputation “as a political gambler who is destabilising the Arab world” (The Independent, 9 Jan 2016 reporting on the German intelligence agency, the BND, assessment) and who holds the nickname Mr Everything because of the power he holds, you wouldn’t want to bet against him. He also reads Winston Churchill and Sun Tzu’s The Art of War.