With Iran’s output, next year’s oil prices will be lower still

Oil prices fell sharply after Opec failed to reach an agreement at its December 4 meeting in Vienna. And lower prices are almost a certainty in the new year because the International Atomic Energy Agency is likely to give the green light for the lifting of sanctions on Tehran at the meeting in Vienna on December 15.

This would permit the sale as early as January of extra barrels, which are already transported to markets in anticipation. The short-term rise will be 500,000 barrels per day, according to Iran’s petroleum minister Bijan Zangeneh.

At the Vienna meeting, the Iraqis also did not want an Opec agreement hobbling their plans for adding a further 200,000 to 400,000 bpd to gains of about 1 million bpd they made during the past year in rehabilitating oilfields with the help of major oil companies.

The new Ecuadorean oil minister, Eulogio Del Pino, told me that he had wanted the organisation to agree on cuts to the 30 million bpd quota that had been in place but unobserved since 2011.

The Saudi delegation floated the idea of a 31.5 million bpd production limit with some accommodation of the Iranian sanctions situation, then distanced itself from the proposal when it became clear that there were too many unresolved problems. A leading Saudi delegate told me that the stance of Iran and Iraq precluded any compromise.

The Saudi oil minister Ali Al Naimi had also made any limitation on Saudi output conditional on wide non-Opec participation in production cuts.

Given that the Russian minister did not even show up for an informal discussion in Vienna on non-Opec cooperation, any accord on stabilising the volatile oil market would have been stillborn.

The Saudi position has to be put in the context of their change in last year’s policy from stabilising prices to defending market share. After recovering from a 2009 low of 7.1 million bpd during the financial crisis, Riyadh’s net exports of crude and products declined from 8.1 million bpd in 2012 to average 7.7 million bpd last year.

What the Saudis feared was a repeat of three decades ago when Saudi net exports declined from 9.5 million bpd in 1980 to 2.5 million bpd in 1985, a period during which they attempted to defend the Opec price structure.

At the time, most other Opec members were ignoring the country quotas to sell as much oil as possible for the high prices caused by the Iran-Iraq war.

The Saudi petroleum minister at the time, Sheikh Ahmed Zaki Yamani, ironically remarked mid-decade that other members were willing to defend the Opec price “down to the last Saudi barrel”.

What followed was the 1986 oil price war, when prices went from the mid-US$30s down to $8 per barrel as the kingdom won back its market share through “netback contracts”, under which buyers could not lose because the price of Saudi crude was based on refined product realisations. Even after the August 1986 accord between Riyadh and Tehran restored prices to more than double the price war low, it took more than a decade for Opec demand and prices to embark on a steady upwards course.

It is clear that the current Saudi market share focus is aimed at short-circuiting a repeat of their bad experience in the first half of the 1980s.

Still, current prices are hurting all oil producers, including Saudi Arabia, which is running a large budget deficit. Riyadh would prefer to stabilise prices at a higher level, but it will not take any move to limit production until other major producers all agree to participate in output limits.

Iran maintains it has to regain a good deal of the 1.4 million bpd in net exports it lost during the period from 2011 to last year because of UN and US sanctions. This will take time because upstream investment is required and companies are wary of the reimposition of sanctions.

Several months of price pressure may change the position of Iran and Russia. It is better to get $55 per barrel on 96 per cent of your capacity than $30 on 100 per cent. But political and other obstacles may prevent common sense from prevailing.

The psychological element may be more important than any. The market share emphasis is one of the ways of pressuring non-Opec for cooperation.

At the end of the Vienna meeting, the UAE’s energy minister, Suhail Al Mazrouei, told me that the rise in Abu Dhabi capacity was simply the replacement of high-cost shales and other unconventional production with more efficient sources.

He implied that Arabian Gulf producers would press on relentlessly with expanding market share. This position not only justifies the capacity expansion programme in Abu Dhabi, but also prompts bankers to remove their support for shale companies and may bring Russia and other producers to the table next year.

Jim Crawford is the managing director at Sharjah-based Inter Emirates General Trading Company

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