The long and winding road written by Paul McCartney and released by the Beatles back in 1970 seems like a fitting ballad to define what has been a long journey to a potential deal between Opec and non-Opec producers. Let’s roll back the clock to January 2016.
Oil prices collapsed to $27 (Dh99) a barrel and panic began to spread in the industry, even in the energy belt of the Middle East. The strategy to flood the market with crude and muscle out higher cost producers two years ago had sputtered badly. It was time to alter course and take collective action.
Initially, the plan was to convene a meeting by March, that stalled and stretched out to a May gathering in Doha, under the auspices of Qatar’s Minister of Energy Mohammad Al Sada, who is also the rotating President of Opec.
What looked like a slam-dunk in basketball terms to secure an agreement, failed miserably. In sum, the new Deputy Crown Prince of Saudi Arabia, Mohammad Bin Salman, refused to clear a deal unless Iran signed on the dotted line as well.
This tug-of-war between regional rivals prevailed through the summer, with a tremendous amount of jockeying by producers and a high level of shuttle of diplomacy by the new Opec Secretary-General Mohammad Barkindo.
Nearly all the pieces of the puzzle fell into place at an extraordinary meeting of Opec states in Algiers. It was agreed that Iran, Libya and Nigeria earned special exceptions as a result of either sanctions or conflict hampering output.
Job done, you may say? Not quite.
Going into the Algiers meeting, Iraq’s Petroleum Minister Jabbar Al Luaibi told me in a CNNMoney interview that he was a confident a compromise could be found; he left out the vital point that it had to be done on his terms.
Any cut or freeze to output would, in Iraq’s case, have to be agreed on a record output of 4.7 million barrels a day. Herein lies the problem; the industry consensus puts the country’s current production about half million a day below that.
So that is the state of play before the next Opec meeting on November 30 in Vienna.
Here is the tally of the effort to date:
• Twenty countries — from Algeria to Venezuela — are involved in the effort offering production cuts of up to 4 per cent;
• They represent over 50 per cent of global output; and
• The goal is to take about a million barrels a day off the market.
Oil strategists now feel there is a 50-50 chance that a deal that includes cuts (as opposed to just a freeze) can be etched in stone. As Kazakhstan’s deputy minister said, with a tinge of frustration, it’s time to get real with the numbers. The time for floating proposals is over.
Reality has already set into the market. Prices, as Opec’s Barkindo proudly suggested, climbed $10 a barrel since August to a 15-month high. However hints of potential failure brought the global benchmark below $50 again.
It is a tough and high stakes geopolitical game that we are seeing play out. Russia is willing to cooperate, it says, but in the meantime decided to boost production to a record of more than 11 million barrels a day.
It also seems implausible, having covered Opec for the past 25 years, that Saudi Arabia and the other Gulf producers will stand back and let Iraq prevail after already adding over 2 million barrels a day the last couple of years.
We will find out shortly, but many in the market believe that the group of 14 producers may have hit a collective record last month.
So the dynamics have not changed. A huge surplus of crude is still there, with over 3 billion barrels in storage. The market rebalance has not taken hold as many suggested back in June and there are projections from energy consultants such as Wood Mackenzie that spending will be cut by $1 trillion over the next five years if prices don’t rise and stabilise around $60 a barrel.
We’ve seen the impact of lower prices eroding sovereign reserves and the latest batch of earnings from the likes of BP, ExxonMobil and Shell did not look promising. To top all off, Goldman Sachs is predicting prices could tumble to $40 a barrel if a deal does not materialise.
As the Beatles suggested in the lyrics of their global hit: “I’ve seen that road before. It always leads me here. Lead me to your door.”
This time, all 20 players around the table need to cross the threshold and not leave Vienna as we reach the end of this long and winding road.
The writer is Emerging Markets Editor at CNNMoney.