x Abu Dhabi, UAESaturday 20 January 2018

Time for actions of some to match their rhetoric

Rarely does the outside world get a glimpse of what happens behind the closed doors of the OPEC ministerial conference.

Rarely does the outside world get a glimpse of what happens behind the closed doors of the OPEC ministerial conference. Only when things get really bad do signs of discord emerge from the shuttered hall on the third floor of the group's headquarters on the banks of the Danube. In 2000, for example, the Iranian minister stormed out of the meeting complaining that another minister, who he did not name, was taking calls on his mobile phone from the US energy secretary, making any independent decision-making impossible.

It is still not completely clear to me whether one of Washington's friends in OPEC was really taking orders during the meeting, or whether the Iranian minister was just scoring a cheap political point with a walk-out at a particularly sensitive time for Arab relations with the West. After last Sunday's meeting at which ministers agreed to hold off on deeper output curbs, the communiqué delivered at the end of the three-hour session revealed little evidence of discord.

But the numbers show quite a different story. A huge variation in compliance with the record supply cut agreed to in December must be putting huge strains on the organisation, and these will have to be resolved over the next two months if OPEC is to achieve its objective of between $60 and $75 a barrel. If you look at the figures, four countries in the Gulf - Saudi Arabia, UAE, Kuwait and Qatar - have together removed 2.2 million barrels per day from global oil supplies since September, exactly 100 per cent of the cut they promised at the December meeting in Oran, Algeria.

The other seven members of OPEC have cut just 1.2 million barrels, half of what they agreed. There is talk that Saudi Arabia sent a memo to Angola, which took up the rotating presidency of OPEC soon after joining last year, pointing out that compliance of 25 per cent by the leader of the organisation was doing little to boost public confidence in its decisions. Tehran and Caracas, for example, traditionally waste little time demanding cuts in production and higher prices, as this combines naturally with their political antagonism with the West. But both of these nations, along with Angola, are by far the worst in terms of compliance.

Had ministers agreed to a deeper output cut, as some in the market expected, it would have created an obligation on the Gulf members to make further reductions, implicitly absolving other members of any need to meet their side of the bargain. The call for improved compliance, on the other hand, forces the non-compliers to live up to their rhetoric or face the consequences. Even with the poor levels of compliance observed so far, OPEC said its cuts were beginning to have an impact on the global market. Swollen inventories have begun to ease and the discount for crude oil for immediate delivery, a key indicator of oversupply, is easing.

Oil prices have stabilised at just below $50 a barrel, after a 70 per cent drop in eight months, but ministers warned of downside risks to prices given that the collapse in the global economy is still in full swing. Prices have fallen in response to Sunday's agreement, which disappointed traders who were expecting another cut in the official ceiling. But now the onus is clearly on Iran, Venezuela and Angola to play their part.

Saudi Arabia stuck its colours to the mast when King Abdullah said in December that $75 a barrel was a fair price for oil. Through its full compliance with the cuts, Saudi Arabia appears to indicate that it still believes in this target, which represents for the Saudis a balance between its own budget needs, the needs of the global energy industry to invest in new capacity and alternatives, and the needs of the global economy for moderate energy prices.

Some might have expected Saudi Arabia to settle for a lower price given the weakness of global demand, but its total compliance with the cut reveals a steely determination to achieve its objective. Ali al Naimi, the Saudi minister, reiterated his target on Sunday when he said that $70 to $75 a barrel was an "ideal price" because it represented the level at which marginal producers such as tar sand miners and ethanol producers make money.

He omitted one key actor in that list, Saudi Arabia itself. Under OPEC's market management system, where it adopts the role as the swing producer for the rest of the world, the marginal producer is of course OPEC, led by Saudi Arabia and the other Gulf states. Until OPEC's next meeting in May, Gulf states will be engaged in a delicate exercise in moral suasion with their more financially fragile colleagues to have them join the effort to rebalance global markets and stave off the rigours of a price war.

If Angola, Iran and Venezuela can be persuaded to live up to their rhetoric, OPEC could be in a position to make another credible cut in its official ceiling when it reconvenes on May 28. If that happens, perhaps markets should not give up on a $75 barrel quite yet. tashby@thenational.ae