The algiers pact was a game changer in the international oil markets. Crude oil prices have risen to three month highs above $50 after Opec agreed to cut output to the 32.5-33 MBD range, with the symbolic Saudi-Iranian deal reinforced by a sharp drop in US inventories and Hurricane Matthew’s havoc in the Caribbean. Unfortunately for Opec, the US land rig count has soared since last summer, invariably a leading indicator of rising output from West Texas’s Permian Basin. Nor is it a given that Opec ministers will ratify the Algiers deal in Vienna next month. It also makes dubious economic sense for crude oil prices to soar at a time when the IMF has again cut its global growth forecast and Nigeria, Libya and Iraq all plan to increase oil shipments.
Saudi Arabia abandoned its role of Opec’s swing producer, made possible by the sheer scale of its output, spare capacity and reserves, in November 2014. This was the catalyst for the most brutal oil price crash since Lehman’s failure triggered global recession in the winter of 2008-9. The Algiers pact does not negate the kingdom’s unwillingness to bear the disproportionate cost of an output cut that only erodes its downstream Asian market share. Iran and Saudi Arabia are also bitter geopolitical rivals in Iraq, Syria, Lebanon, Yemen and Bahrain. Just as the Doha output freeze deal in early 2016 fell apart after Iran refused to respect Opec’s output ceiling, the non binding Algiers agreement can unravel at Vienna once the tortuous politics of country quotas are negotiated. Apart from Kuwait, Qatar and the UAE, I doubt if the other Opec states, desperate for petrodollars, will comply with a Saudi Arabian output freeze diktat.
The Iraqi Oil Minister has publicly dissed Opec’s output calculation formulas just a week after Algiers. Ayatullah Khameini’s cronies have insisted that Iran will increase output to its pre-sanction 4MBD level despite the “deal” Oil Minister Bijan Zanganeh reached with the Saudis at Algiers. These are hardly auspicious omens for a done deal in Vienna, as Opec’s “Fragile Five” states (Iraq, Libya, Nigeria, Venezuela and Algeria) have the most political and fiscal incentives to ignore Opec country quotas. If the Fragile Five cheat on their quotas, the Vienna meeting will unravel, Saudi Arabia and its Gulf allies could abandon the Algiers pact – and oil price could plunge below $40. I have been an Opec watcher all my adult life, ever since I met Sheikh Yamani’s son Hani at Wharton and became an obsessive oil futures trader.
Libya is determined to increase its crude oil output to 600,000 barrels a day by the time Opec meets in Algiers. Iran has increased gas condensate exports to Europe to above 500,000 barrels a day and Qom’s top theologian/political elites have denied that Algiers has imposed an output ceiling or limits on Kharg Island cargo liftings. Nigeria has dumped Bonny Light cargos on the spot market. Traditionally, as the market bids up oil prices, Opec’s Fragile Fives (and Iran) raise, not cut, exports. This can well happen in the run up to the ministerial meeting in the city of Freud, Klimt, Sisi and Carlos the Jackal
The tragic brutal escalation in Aleppo reduces the risk of a Saudi-Russian rapprochement. Vienna cannot be a success if Russia does not commit to cap or even reduce its output. Since the 2007 Kremlin budget is predicated on $40 oil, I doubt if a Moscow-Riyadh deal will precede the conclave in Vienna. In any case, Iran, Iraq, Libya and Nigeria alone will offset.
Saudi attempts to enforce an output cut down to the Algiers level of 32.5 to 33MBD. The history of Opec has taught me the hard way that countries ramp up output ahead of Vienna country quota negotiations to maximise leverage at the ministerial meeting. This process alone will spook the oil bulls in New York and London. While 94 million wet barrels are shipped each day in the tanks of the world’s supertankers, 1.5 billion barrels of “paper oil” are traded in the futures/options markets of the IPE and the New York Merc/CME. If speculators see Algiers unravel, oil prices will plunge below $40.
Saudi Arabia’s refinery maintenance season and lower power demand leads to a seasonal dip in output. Yet if Iraq, Nigeria and Libya raise output before Vienna, the kingdom will be forced to cut at a deeper level than it can afford, at a time of fiscal austerity and uncertain international appetite for its planned $10 billion sovereign eurobond. This could make a deeper Saudi cut to accommodate Tehran and Baghdad politically impossible in Riyadh.
Researched and compiled by Matein Khalid. Mr Khalid is a global equities stategist and Fund manager. He can be contacted at: [email protected]
Source: Will Opec’s Algiers deal unravel in Vienna? – World News Report – EIN News
