It was the former Prime Minister of Britain Sir Winston Churchill who was quoted as saying after the Second World War, “never let a good crisis go to waste”. One could apply that same thinking to the oil market crisis of 2016 and the reaction from the world’s major producers.
Panic set in when oil prices hit a 12-year low of just over $27 (Dh99) a barrel on January 20. It was that shock that led to the seeds being planted for a production cut agreement that took the rest of 2016 to deliver.
Since I spend about a third of my life covering the geo-politics of energy, it is worth recounting the effort it took to get 24 producers to cut 2 per cent of global oil supplies to dent a record glut of three billion barrels. The initial push came from an unlikely character, the soft-spoken, media shy Minister of Energy in Qatar, Mohammad Al Sada, who had taken over the rotating presidency of Opec.
After working for two months to reach a consensus, he called a meeting of 18 producers on his home sand of Doha.
A deal looked like it was in the offing, until the new Deputy Crown Prince of Saudi Arabia, Mohammad bin Salman, flexed his muscle and called off an agreement after the long-serving oil minister Ali Al Nuaimi had already flown out of Riyadh. Al Nuaimi could barely hide his frustration going into the meeting and used the back door at the pyramid-shaped Sheraton hotel to duck out when talks broke down.
The tension behind closed doors sources told me was all about regional rival Iran and the country’s expressed desire to stay out of a discussion about a production cut until it regained a pre-sanction level of 4 million barrels a day.
There was so much bad blood spilt at that meeting, that at the scheduled June gathering of Opec ministers in Vienna there was a noticeable absence of substance put on the table. But there was a noticeable difference, a more conciliatory tone emerged from the Kingdom’s new minister of energy and trusted confidant of the deputy crown prince.
Khalid Al Falih told me during an exclusive interview that balancing the market was their strategy with “a very strong preference in doing so in concert with our fellow Opec producers and in coordination with non-Opec producers,” adding with emphasis, “that remains our position.”
So after a quiet summer in the oil market, a new Opec Secretary-General Mohammad Barkindo rekindled the plan for a deal, making visits to Saudi Arabia, Iran, Iraq and Venezuela. Instead of creating a special venue for a meeting, Algeria’s minister proposed using a planned hosting of the International Energy Forum in his capital to corral both Opec and non-Opec players to iron out their differences.
That effort led to what is now called the “Algiers Agenda”, which was followed by an extraordinary meeting of Opec and subsequent agreement to give Iran, Libya and Nigeria special exemptions from cutting output.
The outline of a deal took shape and once Opec agreed to cut 1.2 million barrels it would force players like Russia, Kazakhstan, Oman and Mexico to put their cards on the table.
The rest, as they say, is history. The first joint cut since 2001, nearly 1.8 million barrels, is to start coming off the market starting in January. The aim is to deliver a sustained price recovery within a trading band of $55-$60 a barrel.
The UAE minister of energy suggested there are potentially additional plans in the pipeline. “This is just what we are committed to do, and I think there is more to come from Opec countries. I think together we will achieve the rebound and we will get back to seeing the recovery,” Suhail Al Mazroui told me after the Opec meeting in Vienna.
In its final report before the end of 2017, the International Energy Agency said that if the cuts are done promptly and fully stick, then the market could be undersupplied in the first half of next year.
However, it is not clear sailing through the first half of 2017. The market reaction was solid but the production cuts coincide with strong winter demand in the US and Europe. And if prices stay north of $55 one needs to anticipate the impact this will have on US shale producers who had to retrench during the steep downturn.
“I think an oil price of $55-$60 will allow shale oil producers to make money and drill in some of the core areas quite happily,” said Robin Mills, CEO of consultancy Qamar Energy.
But let’s not spoil the period leading up to the holidays and the New Year. After the deal was sealed over the weekend in Vienna, the ministers of the two largest producers, Russia and Saudi Arabia, shared the podium and talked of common goals to rebalance the market.
As Sir Winston said, it is wise to never let a good crisis go to waste.
The writer is Emerging Markets Editor at CNNMoney