SHANA – The oil market fever never ceases and the struggles over how OPEC’s oil supply rises in the market linger; such struggles have three major drives: US interventions and the occasional tweets of the country’s president to persuade OPEC members to ramp up production, the controversial, and often contradictory, positions of Saudi Arabia and Iran’s solid stance in underlining details of the agreement struck in the recent OPEC summit.
Donald Trump in his most recent tweet, today (July 5th), blamed OPEC for rising gasoline prices, and in an imperative tune to members of the organization, said: “Reduce world crude prices now!” The tweet received a sharp reaction from Iran’s OPEC boss Hossein Kazempour Ardebili who warned that global crude oil prices would go even higher if Trump keeps sending such tweets regarding the prices. Apparently, the consequences of the agreement reached at OPEC’s 174th meeting still grab headlines in the world; during the summit, members of the Organization of the Petroleum Exporting Countries stressed 100% compliance to the output cut deal the body struck back in November 2016 to bring production down by 1.2 million barrels a day. The pact was joined by non-OPEC suppliers, including Russia, with 600,000 b/d of oil supply cut in the market. But interpretations of this decision, whether willingly or unwillingly, have been differing ever since it was announced by OPEC. Therefore, an understanding of various aspects of the decision would make it easier for us to grasp the various aspects of OPEC’s production policy.
- After the 174th OPEC summit, most of the Iranian media outlets including Iranian Ministry of Petroleum’s official website (Shana), interpreted the agreement as a win for Iran and an all-out support for the country’s stance in the organization. On the contrary, foreign media outlets preferred to put such headlines to cover the event: 1mbd Increase in OPEC Oil Supply. The question here is whether Iran was able to step in line with its interests in the meeting or not. To answer such questions, the clear stance of Iranian Minister of Petroleum Bijan Zangeneh upon arrival at Hotel Kempinski in Vienna would be sufficing: “According to the previous OPEC agreement, it was planned to reduce about 2 million barrels or output, which is currently at around 3 million barrels; so if OPEC members supply one million barrels of oil to the market, it is no longer a problem, and there is no need to increase production.” Therefore, no decision was taken for boosting production by OPEC from the previous agreed ceiling. Iran has adhered to its positions and won over fellow OPEC members who had differing views about the organization’s production policy.
- If a million barrels of oil is expected to be added to OPEC supply (based on the group’s November 2016 agreement), the question which remains to be answered is: Which countries are to supply the envisaged oil volumes? Following the OPEC summit, Mr. Zangeneh repeatedly stressed that the recent OPEC agreement does not mean than a country would supply more oil than its quota and members were required to supply output only based on their quota. This clearly means that Saudi Arabia cannot, based on this agreement, replace Venezuela’s oil supplies in the market. Naturally, as Mr. Zangeneh had predicted, no more than 500,000 b/d would be added to the supply. In contrast, the ministers of oil and energy in Saudi Arabia, the United Arab Emirates, and Iraq, mentioned various numbers as the amount of oil coming to the market, and finally, the US president, sent a tweet about talking with Saudi Arabia’s King Salman, aggravating the situation.
“Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!”, tweeted Trump. The message went nowhere with the timely stance of Iran’s OPEC governor which forced Saudi Arabia to back down. Mr. Ardebili, reacting to Trump’s tweet said: “Regardless of the fact that no such capacity exists in Saudi Arabia, this request can be inferred as a US order to Saudi Arabia to leave OPEC.” Of course, this was not the end of the story. Mr. Zangeneh, for his part, sent a letter HE Suhail Mohamed Al Mazrouei, the UAE’s Minister of Energy and OPEC President, in which he noted that “we have not arrived to any decision to assign any allocated production level of any member to others”. We must admit that the retreat of Saudi Arabia and the implied denial of Mr. Trump’s demand from Riyadh, on the one hand, and the recent letter of Mr. Zangeneh to Al Mazrouei, in order to remind him details of the OPEC consensus, vividly show that at the 174th OPEC summit, no permissions were given to a member or members to replace other members in the market.
- How will the recent OPEC agreement be implemented in the market? And how much more oil will be supplied to the market? What is certain is that OPEC and non-OPEC countries have agreed to reduce their commitment to the output cut plan, but it is clear that reimbursing the limited supply of oil by a country like Venezuela, which produces more than 600,000 fewer oil barrels than its commitment, is not possible at once. And returning one million barrels of oil to the market, provided that members stay committed to the OPEC production ceiling, would not be possible, if OPEC wants to move towards full compliance with the output cup plan. Then, how could this conundrum be addressed? To answer, we’d better refer to Mr. Zangeneh’s letter to Al Marzouei. “In fact, the resolution by requiring “JMMC to monitor and report back to the President of the Conference” has rested the issue to the President to deal with the issue either through calling for extraordinary meeting or seeking consensus through communication with all Member Countries.” Therefore, it is likely that if by the end of July (the first month of the OPEC 174th summit agreement), surveys show that the compliance of OPEC and non-OPEC producers to the production cuts were beyond 100%, and, according to the JMMC, an extraordinary conference would be held with the presence of, or by correspondence, of the members, to decide on how to implement the recent agreement. Obviously, by that time, there can be no definite estimation of the level of increase in production supply to the oil market. At the same time, given the emphasis of OPEC members on the necessity of full compliance with the production cuts, and the inability of some members to boost their output, some members, with surplus production capacity may be given permission to increase their output in order to fully comply the level of OPEC production cuts. But let’s not forget that taking any decision in this area will require a consensus of all the members, and Iran will undoubtedly have a definite position, like the 174th summit, and may propose to preserve the production quotas of such members that are incapable of producing them for a time in the future that they will be able to do so.
Anyway, the oil market is expected to witness increased oil supplies, and Saudi Arabia will undoubtedly be the key to delivering this supply. But does the kingdom enjoy such spare capacity, as Trump says, to boost its output by 2 million barrels per day or it can at best replace Venezuela in the market? Amrita Sen, Chief Oil Analyst at Energy Aspects said: “We will be in unchartered territory. While Saudi Arabia has the capacity in theory, it takes time and money to bring these barrels online, possibly up to 1 year”
GARY ROSS, head of global oil analytics at S&P Global said: “The Saudis do not have 2 million bpd of spare capacity as it would imply production of 12 million bpd. They can likely produce a maximum of 11 million and even that will be running their system at stress levels.”
Gary Ross, head of the Global Oil Research at S & P Global (PLATS), said:” The Saudis do not have a surplus capacity of 2 million barrels per day, as it means bringing production to 12 million barrels; they are likely to They can produce up to 11 million barrels per day, and even push their oil structures.
Trump’s oil tweets and his consultations with the Saudis for increased oil supply, grab headlines everyday. On Tuesday, Reuters published a commentary on Trump’s accession of OPEC to manipulate oil prices. “The awkward tension between the administration’s foreign policy priority (tough Iran sanctions) and its electoral calculation (to keep gasoline prices low) explains its increasingly frequent comments about oil prices,” wrote Reuters.
It continued: “President Donald Trump has already blamed the Organization of the Petroleum Exporting Countries for the sharp rise in prices that has pushed the average cost of U.S. gasoline close to $3 per gallon”. What is Washington seeking after all? Analysts say because heated oil prices made shale oil production more economically feasible in the US, they would serve White Houses interests. Iranian Minister of Petroleum Bijan Zangeneh, speaking on the sidelines of the recent OPEC summit noted that “US president had no trouble with the increase prices but wants to show the American public that he opposes high prices and put the blame for the price rise on OPEC. It is the US government that has created the current situation and must put it back in order.” Trump’s latest tweet which accused OPEC for the price hikes, made his administration’s double-standard policies more evident than ever. Trump expresses concern over gas prices in the US while the price of oil is only one of the factors that determine gas prices. Even if this is not the case, and the oil price increase determined the price of gasoline, OPEC would not be to blame for the price hikes. Certainly, no country is supposed to excite the market by exerting pressure and sanctions on some countries and disrupting the supply of oil, and then expect others to pay the price for this inflation. Kazimpour correctly predicted that “the US approach is a kind of self-harm and will cause soaring prices.”
Some may ask: “It is not far-fetched to imagine Saudi Arabia do whatever it can to achieve their goals and interests in any way, and won’t be necessarily delayed by an OPEC permission. In such a situation, what would OPEC consensus and agreement mean?” not a bad question. Nothing can be foreseen; especially given the fact that OPEC is an organization whose decision-making mechanism relies on the political will of its member states and, for example, there are no mechanisms for punishing or fining members. But the recent consensus may be important in this regard as it deems any act contrary to the framework of the agreement as a violation of OPEC’s authority, whereby the violators of the agreement can be put pressure on. Right or wrong, this is still important for OPEC members. Iran’s OPEC governor, under the pretext of responding to Trump’s latest tweet on oil prices, reminded the necessity of this unity and authority to the world, saying: “Our Muslim brothers in Saudi Arabia are an educated and mature nation that do not allow you to treat them like this and order them. We may have differences of taste with our brothers in Saudi Arabia, but we have learned how to live together.” OPEC, as Zanganeh has repeatedly emphasized, and other OPEC leaders have confirmed it, is not a political organization. The members are determined, even in appearance, to keep the organization moving in the path of maintaining market stability and avoiding politicization of the group. However, the fact is that in the long run, the one and only trump card in the oil market is the production power and potential. The solid and indispensable role of Saudi Arabia and Russia in the oil market stem from their production capacity. It is clear that Iran, with a production capacity of four million barrels per day of crude oil, cannot be as effective on the market as a country that produces 10 mbd of oil; however, it has proved to be more powerful in the market given its firm energy diplomacy so far. We must have a long-term approach and plan for the far future. We must resign to this reality that by not enhancing our production capacity, we cannot have high expectations and talks to the world with such tones as “if we don’t produce, others will not be able to produce.”
Maybe today, there is no need to supply more because of a balanced oil market, but it will not always be the case, and any kind of oil diplomacy cannot be effective and determining in the long run without reliance on production capacity. The role of production capacity cannot be denied no matter how much OPEC supplies crude oil in the market at whatever prices. In order to be an effective player in the market, we have to remove production barriers in our country and find a market for the sale of our oil; a market that will not be created except in the context of interaction with the world.