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Abu Dhabi, UAEMonday 16 July 2018

After Doha, what next for Opec?

There was little reason to hold the Doha talks at all. The prospect of a freeze led to a bounce in prices, but that has just helped to sustain US shale oil producers without changing market fundamentals.

Opec has had some infamous meetings in its history. An ill-timed hike in quotas in Jakarta in November 1997 led to a crash in prices, while the June 2011 “worst ever” meeting in Vienna, as the Saudi oil minister termed it, failed to stop prices from rising. Doha last week was, perhaps, not in that league but still blended tedium, surprise and dysfunction, even more embarrassingly for including key non-Opec players.

Most Opec countries attended along with non-Opec leaders such as Russia and Oman. It seemed that the previously announced deal to freeze production at January levels was a formality, especially as most countries involved could not or would not increase output anyway.

But at the last moment the Saudi position changed, and it became clear they would not agree to freeze production unless Iran were included. The Venezuelan oil minister Eulogio Del Pino said: “Even [the Saudi oil minister, Ali Al] Naimi didn’t have the authority to change anything … One minister told me it was his worst-ever meeting.”

It is unclear whether the Iranians were discreetly warned off attending by the Qataris, or chose not to attend on the request of their allies, the Venezuelans, who thought it would increase the chance of a deal. Iran had already made it clear that, having just escaped one set of sanctions, it would not sanction itself by limiting its production before it has recovered to its maximum sustainable level.

Iraq at least is keen to try again, with a meeting in Moscow in June. But the failure of the talks is a setback for the Russian energy minister, Alexander Novak, who had invested considerable political capital. Non-Opec states will be sceptical of future schemes for cooperation. The previous Qatari oil minister, Abdullah Al Attiyah, believes that the meeting should not have gone ahead unless the outcome had been “pre-cooked”.

As I warned in February, “the Saudis would be reluctant formally to concede market share to a rival”. As the only producer with substantial spare capacity, they would have been most constrained by a freeze. They also need room to increase production in summer to meet domestic demand for air-conditioning.

For now, the breakdown of the negotiations may not matter that much. Growing demand, falling US production and interruptions in output from the Kurdish region and Kuwait to Nigeria are helping to rebalance the market. Global demand remains reasonable, with India a bright spot. Conversely, strikes and political unrest threaten output unpredictably in a number of countries.

But in that case, there was little reason to hold the Doha talks at all. The prospect of a freeze led to a bounce in prices, but that has just helped to sustain US shale oil producers without changing market fundamentals.

Who else might now make a dash for higher production? Plenty of countries – Iran, Iraq, Libya and Venezuela – have the reserves to do so; few have the right political or economic environment. Saudi Arabia undoubtedly could boost output now – Deputy Crown Prince Mohammed bin Salman noted that his country could go to 11.5 million barrels per day (from 10.2 million bpd in March) immediately, to 12.5 million bpd in six to nine months, and 20 million bpd with further investment.

Yet the expansions of Saudi Arabia’s Khurais and Shaybah fields are intended to sustain current capacity, not increase it. Even to sustain current exports of about 7 million bpd, as domestic demand expands by 100,000 to 200,000 bpd each year, Aramco will have to invest in new field developments. To continue to wage a struggle against Tehran for market share will require bigger and prompter investments.

The exporters’ organisation soon recovered from its setbacks in Jakarta and Vienna. The fallout from Doha, less serious for now, may cloud Opec relations for longer.

Robin Mills is the chief executive of Qamar Energy and author of The Myth of the Oil Crisis.

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