There is a new attitude — one much more collegial in nature with a common goal — emerging from Opec that is being driven by the group’s largest producer Saudi Arabia. It’s been two-weeks since the 13-member group met in Vienna and there are no signs of dissension in the ranks. In fact, for the first time since the end of 2014 ministers seem to be singing from the same hymn sheet.
This is still early days, but some kudos should be given to the new minister of petroleum in the Kingdom, Khalid Al Falih, who is certainly no stranger to the world of oil. Al Falih has been with Saudi Aramco since 1979, where he remains chairman of the globe’s largest oil company as it prepares to float up to 5 per cent of the group sometime over the next 18 months.
Gone are the threats of flooding the market with crude that we heard ahead of the Doha meeting, which brought together Opec and non-Opec producers in a fruitless effort to freeze production. Yes, the Kingdom will sustain production capacity of 12.5 million barrels a day, but don’t expect an expansion of output, which hovers around 2 million barrels below that level.
Al Falih believes the market is starting to rebalance itself due to the fall in non-Opec production; so immediate action was not needed despite efforts by Saudi Arabia and others to float different ideas to reduce production. But the level-headed oil veteran does not agree with the position of some of his peers in the Gulf that $50 a barrel is a good target for the time being.
“I don’t share the opinion that we should have a price target per se. I think we need to let prices come to a level where supply and demand will balance and investment flows go back where they need to be,” Al Falih told me after the meeting. “I don’t think $50 is achieving this today.”
To my surprise, he went on the record suggesting that $60 a barrel is “very possible” by the close of this year. As more non-Opec production comes off the market, he believes that prices could move even higher in 2017 as three billion barrels of surplus supplies get used up.
He did not however hide his concern for the medium term, that the low level of investment today will come back to haunt Saudi Arabia and other Opec producers. “As I look to the mid and long term, I get concerned that there is a shortage that we will have a price spike which will have a counterproductive impact on the long term stability of oil.”
We know by industry surveys that oil and gas investment is falling off the cliff. Energy consultancy Wood Mackenzie calculates that nearly $400 billion of projects have already been shelved. That is what concerns Al Falih. The dynamics at this stage were too tricky for a deal to reduce output, but a senior Gulf delegate told me the concept of a freeze along with non-Opec producers is in his words “still very much alive”.
It would be difficult to deliver an Opec consensus for such a move prior to Iran hitting its pre-sanctions level, but the timing to get something done may not be far off.
In a one-on-one interview with CNNMoney, Iran’s petroleum minister Bijan Namdar Zangeneh said the country is producing just over 3.8 million barrels a day. That is well ahead of what the naysayers were saying last autumn, but he clarified the near term goal is to reach 4 million barrels by March of next year.
When Opec ministers gather in Vienna November 30, all the countries will have a clear line of sight where Iran stands and whether the forecast of another three quarters of a million barrels of non-Opec will have vanished from the market as many are expecting, including the International Energy Agency.
While Zangeneh went into the twice-annual meeting suggesting a new quota without verification by each member country was a waste of time, he too sounded like a changed man when proceedings came to a close.
“It was a very constructive meeting and discussion without any tension after many months and because of this atmosphere we could reach many agreements,” he said with a constrained grin.
So, in the early days of the Al Falih era, Iran was provided some breathing room, but this newfound collegiality may have a sell-by date of November 30. If there is a collective will to establish a new quota, Saudi Arabia and others suggested Iran must be part of the team.
“If there is an interest in putting a ceiling on the organisation, then Iran will have to participate in that ceiling. Iran will freeze like everybody else,” said Al Falih.
The writer is CNNMoney’s Emerging Markets Editor.
