Qatar’s OPEC MAX meeting and the oil price rout that wasn’t

There was much gnashing of teeth as Qatar’s grand meeting of oil producers failed to reach agreement April 17 to freeze production at January levels.
Commentators predicted a collapse in oil prices and some discerned the demise of OPEC itself.
But since then the expected rout in prices has yet to materialize, stock markets have been unfazed, and the outcome from the point of view of OPEC’s dominant Arab Gulf members may not be unsatisfactory.
No doubt some delegates found it annoying to needlessly spend 12 hours cooped up in a five-star HOTEL IN Doha, albeit with a visit to pay their respects to the emir of Qatar, Sheikh Tamim bin Hamad Al Thani.
The failure of the talks was an embarrassment and will be felt by OPEC’s weakest nations, particularly Venezuela, which is in a state of crisis and badly needs oil prices to rise.
That prices did not immediately fall more than a couple of dollars owed something to a strike by oil workers in Kuwait, which caused the country’s production to fall initially to just 1.1 million barrels per day, barely a third of normal levels.
In the aftermath of the talks, Russia, which had invested much effort trying to broker a deal, indicated it would continue pumping at record levels, above 10.8 million b/d, helping to cap prices.
Amidst the failure to agree a freeze and Russia’s determination to boost output, there were reasons for markets not to panic, at least for the time being.
Markets had after all not given much credibility to the proposed production freeze. And production prospects are now depressed not only for Venezuela, but a number of countries worldwide.
Some observers are starting to doubt Iran has much more to offer the market for the time being than the increase it has managed since sanctions against it were lifted in January – generally estimated at 300,000-350,000 b/d.
Investment bank Tudor Pickering Holt said April 18 that further significant increases from Iran would require more capital expenditure, which was “not likely in the current environment.”
More fundamentally, the economic impetus for a production freeze has somewhat waned since the idea was first proposed in February. Back then, prices were around $10/b lower than when the April 17 meeting came round, and had recently hit $27/b, amid generalized worries about the global economy and China in particular.
Since then, the outlook for the world economy can’t be said to have transformed. But in terms of oil demand, some of those jitters have eased, as documented by successive monthly reports from the International Energy Agency.
In February the agency was talking of a “false dawn” for oil prices, in March this had changed to “light at the end of the tunnel.”
By this month it was predicting oil markets would come “close to balance” in the second half of this year, with supply exceeding demand by just 200,000 b/d in the third and fourth quarters.
Oil demand in China, India and Russia has been robust, the IEA added. Why then sweat to get a deal in Doha?
The question was pertinent for OPEC’s core Arab state members and above all Saudi Arabia, which had given mixed signals about the proposed freeze.
Saudi Arabia has cast doubt on the desirability of oil prices rising much further, sometimes framing the issue in terms of diversifying its economy.
In terms of oil markets, one question is how far prices can rise without causing a rebound in US shale oil production. The answer, with hundreds of US shale wells drilled but sitting idle – uncompleted and waiting for prices to rise – may be not much.
“As things get back into the $40-45 range then we would start completing the drilled but uncompleted wells,” James Volker, chief executive of Whiting Petroleum, which has around 150 such wells in the Bakken and Niobrara shale, said in February.
But the April 17 meeting in Qatar was about more than prices. For some participants the idea of sealing a major pact on supply management outside of normal OPEC boundaries – brokered by Russia, with help from rising regional power Qatar – may not have been attractive.
Granted, the collapse of talks was a blow to participants’ prestige, but what might have been worse for some would have been a deal that effectively replaced OPEC and its six-monthly meetings in Vienna, and put Russia in the driving seat of a larger, more nebulous group, with the Gulf Arab states’ control diluted.
Qatar’s rise as a diplomatic force, financed by the latest big thing in energy markets, liquefied natural gas (LNG), has raised hackles among some Gulf states.
Probably more significantly, Russia’s flexing of its muscles in the Middle East has not made for comfortable viewing for a Saudi regime that has made clear where its international focus lies. That is not Russia. Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman made this evident in an interview with Bloomberg ahead of the April 17 talks, saying: “America is the policeman of the world, not just the Middle East. It is the number one country in the world and we consider ourselves to be the main ally for the US in the Middle East.”
Tellingly for those heading to Qatar, he added: “I don’t believe that the decline in oil prices poses a threat to us.”