EOG MARKET WATCH - Egypt Oil & Gasnewsletters.egyptoil-gas.com/marketWatch/2016/30-11-2016/... · 2016-11-30 · World’s largest crude oil exporter, Saudi Arabia, has been boosting

The Unlikelihood of an Oil Freeze Plan

Author: Salma EssamEditor: Nataša Kubíková

Issue 1 - November, 2016

EOG MARKET WATCH

/EgyptOilandGas /EgyptOilandGas /EgyptOilandGas/Egypt-Oil-&-Gas

www.egyptoil-gas.com

Fluctuation in global crude prices has always been in the focus of economic and financial news. Introducing the idea of cap-ping oil production, as OPEC recently agreed upon in Algeria in September, emerged from the need to lift oil prices. The Algiers meeting gave industry leaders some hope as it signaled a slight shift in Saudi’s previously intransigent strategy to pump crude oil flat out to maintain the country’s lion’s market share. Howev-er, some indications throw to the fact that OPEC members may revert to take this decision and that the oil freeze plan will be unlikely to take effect before the end of 2016.

• INTRODUCTION• CONTEXTUAL ANALYSIS• FACTORS IN THE GAME

A. Market Share

B. InternatIonal oIl Supply

C. InternatIonal oIl DeManD

• OIL FREEZE PLAN NARRATED• CONCLUSION

CONTENT

SUMMARY

THE UNLIKELIHOOD OF AN OIL FREEZE PLANEOG MARKET WATCH - ISSUE 1

Egypt Oil&Gas, 15B/1 Repeated, Extension El Laselky St. Behind USAID, New Maadi, Cairo, Egypt, [email protected]: No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent from the publisher.

INTRODUCTION

As the oil industry has witnessed significant fluctuation and unprecedented fall in oil prices, OPEC members have been involved in discussions to curb oil production in an attempt to rebalance the market. They have recently agreed upon a preliminary plan to cap oil output, a plan that was concluded at the International Energy Forum held in Algeria in Septem-ber 2016.

The analysis at hand puts forward the motives of oil produc-ing countries hampering a deal and the market conditions that makes the plan less realistic to come about in a foresee-able future. Global oil market share, oil demand and supply calculus, and oil prices are key variables to consider, which up until now indicate that the unlikelihood of an oil freeze plan is growing.

Currently, there are growing indications that OPEC will not be able to succeed in the projected oil freeze deal. One of possible indications is the inconsistency in what has been concluded at the September meeting in Algiers and several other OPEC debates prior to that, and what came out of fol-low-up informal talks between OPEC and non-OPEC coun-tries held in Istanbul in October.

Furthermore, the reluctance of some countries to actively contribute to the oil freeze plan poses another conundrum. Several OPEC members such as Iraq and Iran clearly stated they were not to participate in these negotiations. Riyadh’s position has also turned into a headache.

In addition, although OPEC members agreed on the need to limit oil production, the amount of oil that each country will be allowed to produce has not been decided, nor even suggested. This remains on the agenda for the next formal OPEC meeting to be held in Vienna, which is scheduled on 30th November, 2016.

Given the past failures to reach similar arrangements, little can be expected to happen before the year break. Just like the May preliminary freeze plan agreement was discarded, the initial road-map-setting accord from Algiers appears to eventually get torn to pieces.

A binding agreement over curbing oil output, as many may wish for, is thus unlikely to become a reality by the end of 2016. Yet, a possible success story in this matter in 2017 will still depend on a series of cardinal factors; one of them is the outcome of the Vienna meeting.

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CONTEXTUAL ANALYSIS


In September 2016, OPEC members discussed the propo-sition of curbing global oil production after four hours of talks at a meeting held in Algeria. Despite that the oil freeze plan suggested last April was not agreed upon, OPEC committed itself to reducing output to between 32.5mb/d and 33mb/d, in the recent negotiations. This has prompted prices to go up in the first week of October. Brent crude jumped $2.84 a barrel to $48.85, an increase that pointed to a coordinated action to bolster oil prices since the oil crisis has begun in mid-2014. Hence, the meeting gave hope to the industry leaders that a curb in production could boost oil prices. It also signaled another change in Saudi’s strategy to pump crude oil flat out to maintain the country’s lion’s market share.

Meanwhile, OPEC members have reached out to non-OPEC countries to cooperate in putting Algeria’s accord in action. In early October 2016, OPEC and non-OPEC members held talks on limiting production in the Turkish city of Istanbul. On its side, Russia pledged that it will comply with an awaited OPEC deal.

Yet, neither the talk in Algeria nor that in Istanbul had set straight any concrete details of the accord that is expected to be binding for all members participating in the agreement. For example, it did not set the output quotas of each country, which makes the agreement likely to fail had the output lim-its been inconvenient for some. Energy Analyst and Pulitzer Prize-winning author, Dan Yergin, told CNBC’s Squawk Box program: “OPEC’s track record on adhering to production cuts to quotas is ridiculously poor … if not nonexistent. You can’t believe they’re going to come through on this one ei-ther.”

Moreover, the talks held at both meetings have not been sealed via any official document. Even more so, a negative track record of abiding by previous agreements concluded between OPEC and non-OPEC players strongly suggests that any future ones will also remain unfulfilled over each country’s national interest. Former OPEC Head of Research, Hassan Qabazard, said in a phone interview with Bloomb-

erg following the talks in Istanbul: “I was in Oran, Algeria in 2008 when Russia pledged a cut of 400,000 barrels a day and Azerbaijan pledged 150,000, but they didn’t deliver their promises.”

In all cases, even if the circle is broken and OPEC does come with any arrangements, the current state of affairs raises concerns over if and how a solid agreement can be implemented. According to Bloomberg, Strategists at Mor-gan Stanley, led by Adam Longson, said that “this is not the only OPEC agreement to limit production in this downturn, and thus skepticism on finalization is warranted. Even with an agreement at the November 30th meeting, actual reduc-tions in OPEC production probably won’t be fully in place until sometime in 2017.”

The motives of some OPEC countries to avoid freezing crude output hamper future agreements and the current market conditions and forecast seem to provide them with sufficient rationale and justification to do so.

Goldman Sachs forecast that Brent crude oil prices will av-erage $39 per barrel in 2016 and $60 per barrel in 2017. It further estimates that WTI’s crude oil price will average $38 per barrel in 2016 and $58 per barrel in 2017.

In Q2 of 2016, almost two years since oil prices tumbled, OPEC members considered the decline as temporary. They expected a rise in crude oil demand, which would help to re-balance crude prices, already in Q3 and Q4 of 2016. On August 8th, OPEC stated in a meeting: “This expectation of higher crude oil demand in third and fourth quarters of 2016, coupled with decrease in availability is leading the analysts to conclude that the current bear market is only temporary and oil prices would increase during the later part of 2016.” As this has not yet come into effect and there is no tangible outcome of month-long negotiations among industry giants, positive economic outlook for petroleum exporters – both OPEC and non-OPEC - remains at stake and will necessar-ily frame future development.

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FACTORS IN THE GAME A. MARKET SHARE

OPEC members produce about 40% of the world’s crude oil, while oil exports of the 14-nation cartel represent about 60% of the total petroleum traded internationally. OPEC has a massive oil market share, yet a battle continues among the organization’s countries who are eager to gain or sustain their existing shares within OPEC, on one side, and global-ly, on the other. Struggle for market share, no doubt, repre-sents the top reason why dominant oil producers like Sau-di Arabia, Iran, Iraq, Algeria, and Nigeria may refrain from agreeing on a production freeze plan.

Furthermore, non-member oil producing countries are ex-pected to be wary of agreeing on any such deal as well if it does not reflect on the OPEC vs. non-OPEC market dispo-sition globally. In attempts to sustain their part in the interna-tional oil game, non-OPEC oil producers have played an ac-tive role in the global freeze plan negotiations; nevertheless, their concerns over revenue losses, which are implied in the deal, are likely to prevail and prevent them from agreeing on a potential agreement.

In 2015, the oil industry had closed up in turmoil, wrote The Wall Street Journal in an analysis published in December 2015. The price of oil hovered in the mid-$30 per barrel. More significantly, supplies swamped the market. Yet, OPEC and non-OPEC oil producers achieved little if any progress on how to tackle the emerging dynamics. The current year, 2016, is no different. Top oil producing countries have been continuously railing towards market share, striving to main-tain and in some cases further boost their production capac-ity regardless of the trade balance.

Market share has remained the most important metrics through which a country can gauge the efficiency of its oil production; including export levels, scale of foreign invest-ments, and other revenue generating capacities. This vari-able has pre-defined policy moves by both OPEC and non-OPEC countries.

Geopolitical rivalries have played a decisive role in setting oil policy agenda of involved states and thus shaping the market conditions. Rivalries have remained critical for future prospects.

SAUDI-IRANIAN COMPETITIONWorld’s largest crude oil exporter, Saudi Arabia, has been boosting its production beyond previously established lev-els for years in an attempt to maintain a huge market share within OPEC countries. The Saudis focused primarily on crushing the shale industry of the United States since the American production increased by 4 million b/d from 2009 to 2014, whereas Riyadh’s production increased only 1.64 million b/d in the given period.

More recently, the kingdom has started to shift attention

away from the US, as another player jumped into the game, namely The Islamic Republic of Iran. To date, Saudi Arabia and Iran have sparked an unprecedented competition in the oil market after the latter has been freed from the long-im-posed international sanctions. Riyadh perceives Iran as a ri-val that is trying to become a new regional power. Saudis’ oil foreign policy thus appears to be reflecting upon the newly defined geopolitical ambitions of Iran. Hence, a Saudi-Ira-nian ‘struggle for hegemony over the region and beyond’ bears some explanation about their competition for oil mar-ket share.

As it has been made clear during OPEC negotiations, the Saudis may not be ready to halt their crude oil production for

many reasons, but Tehran is undoubtedly a crucial one. It is highly unlikely that Riyadh will easily let go of its predomi-nant position within OPEC and globally, least of all to grant space to this particular assertive actor in the Persian Gulf region and allow it to expand.

On the other hand, Tehran has been recently the only player capable of significantly boosting its oil production at a fast pace. Iran has recorded the crude production levels rising from 3,611 thousand b/d in 2013 to 3,920 thousand b/d in 2015, according to BP Statistical Review of World Energy 2016 (Graph 1). Meanwhile, Saudi Arabia produced 11,393 thousand b/d in 2013 with a slight increase to 12,014 thou-

2014 2013 2015

Graph 1:CRUDE OIL PRODUCTION IN IRAN AND SAUDI ARABIA (2013-2015)

Data: BP Statistical Review of World Energy 2016 Graph: Egypt Oil&Gas

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sand b/d in 2015. Even though the crude output level of the Saudi kingdom is double what Iran produces at present, the Iranian production trajectory is clearly having a fast upward tendency.

Both Iran and Saudi Arabia are eager to keep pumping at full tilt. On his side, Saudi Oil Minister, Khalid El Falih, has stated that the kingdom is not going to shock the market with a sudden cut in its production. Equally resolute was the statement by Iran’s Oil Minister, Bijan Zanganeh, that the country will not agree to limit oil production as the discussion over an oil freeze plan were brought in at the Doha sum-mit in May 2016. Zanganeh stressed that such a plan would be a “self-sanctioning” one for Iran. It is difficult to imagine how the two countries would be able to strike such a deal smoothly.

The rhetoric of the Iranian officials, nonetheless, slight-ly toned down in September 2016, when Iran’s Deputy Oil Minister, Amir Zamaninia, said that the country will support any measures to revive prices, yet it will strive “to preserve its national interests.” Furthermore, in an interview with The Washington Post earlier in September 2016, Director for In-ternational Affairs at state-run National Iranian Oil Co, Mo-hsen Ghamsari, clarified that “the country will be ready to decide on capping production once output reaches the level it was before international sanctions were imposed on the country.” Iran’s National Oil Company had stressed that it was too early for the country to discuss freezing crude out-put in Algiers. The upcoming official OPEC meeting in Vien-na will hardly present a sufficient time and space for Iran to markedly alter its position.

Saudi-Iranian market share rivalry is not limited to the two oil players. In fact, it strongly showcases a global dilemma as other OPEC and non-OPEC countries have also adopted the same market-share rationale diminishing prospects for attempts to curb production and thus re-balance oil prices. The predicament is voiced even stronger by OPEC oil de-pendent economies.

OPEC OIL DEPENDENT ECONOMIESOPEC-members whose economies depend on oil produc-tion have necessarily cited the market share rationale as well, stressing the necessity to accommodate their position in the global industry. Among them are other three MENA countries - Iraq, Libya, Algeria - and Nigeria, which has re-cently lost its position as the prime crude producer in Af-rica. Iraq and Libya have been engaged in internal fights with ISIS militants that had had a gigantic damaging effect on their oil producing capacities. Nigeria, on its side, has witnessed militant attacks from the Niger Delta Avengers

group. Algeria has been seeking to contain its deteriorating economy through new investments that seem to have failed to occur as originally envisioned. Each of the four countries is thus taking steps to lift its oil industry upwards and main-tain a position among other OPEC members.

IraqIraq, whose economy depends on oil sales for 95% of its public spending, rejects to take part in negotiations over the current oil freeze proposal. In late August, Iraqi’s Prime Min-ister, Haidar Al-Abadi, affirmed that the government will not restrain its crude output as part of any OPEC agreement to lift oil prices. The reason is that the country, despite its increasing crude and petroleum products exports, has not yet reached its full oil market share. Al-Abadi stated: “We are not open to that because Iraq is still below what it should produce.” Iraq is, therefore, set to continue boosting produc-tion, which currently stands at around 4.6 million b/d.

Furthermore, ongoing disruption in oil production, that the country has suffered from due to ISIS militant attacks, has strengthened Baghdad’s willpower to compensate for in-curred losses without the consent of others. Even reaching a progress on the national level came to become difficult. De-cision-making processes that are critical for the country to be able to formulate its oil policies have been hampered. Most recently in March 2016 when a dispute between Al-Abadi’s government and the authorities in the autonomous Kurdish region over control of oil resources stopped Iraq’s oil flow.

The government of Baghdad has meanwhile resumed par-tial pumping from fields in Kirkuk operated by state-run North Oil Company (NOC) and the oil is to be shipped to Turkey via a Kurdish pipeline, as the Iraqi Oil Ministry stated. But the incident indicates that Iraq’s willing participation in an OPEC agreement on curbing oil production may stumble over internal political disputes.

AlgeriaNor Algeria is to be expected to shock its oil-dependent economy with a cut in crude production. The country’s gov-ernment has been determined to boost oil output in an at-tempt to rebalance its deteriorating economy, given that it is dependent mainly on revenues gained from oil and gas re-sources. As a result of the economic stagnation and a deep slide in oil prices, the North African country has thus been exerting efforts to compensate for recent losses in oil reve-nues and to preserve its market share.

Indicatively, Algerian Energy Minister, Nouredine Bouterfa,



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has declared that the country’s number one priority is to boost oil production 30% by 2020. In line with that, Algeria has been seeking to attract fresh foreign investments.

In late May 2016, Algeria’s Sonatrach announced that it will shift its strategy to offer foreign firms direct negotiations to buy stakes in 20 oil and gas fields. Algeria’s parliament ap-proved a new investment law in mid-July 2016, stipulating tax cuts and reducing bureaucracy. Furthermore, the new law states that all imported goods and services intended for investment projects will be exempted from customs duties and value-added tax. But these attractive propositions did not lead to significant inflow of foreign capital. In fact, as it appears, the law failed to address one of the main obstacles cited by would-be foreign investors: a rule requiring local partners to hold a majority stake in new investment projects. This may be one of the reasons why Algeria’s prospect for bringing in new capital has not generated any tangible oil deals.

Hence, giant state-owned Algerian company, Sonatrach, was forced to opt for domestic solutions. It started using technology to maximize oil output at major oil fields. Located southeast of the capital city of Algiers, Sonatrach boosted production at Hassi Massoud oil field where production rose from 420,000 b/d to 470,000 b/d of oil in mid-July 2016. In-crease in production at Ourhoud oil field hit 125,000 b/d up from 100,000 b/d.

Algeria thus remains imprisoned in its economic dilemma with harshly felt absence of foreign capital. This would most likely not allow the Algerian government to restrain itself by any freeze plan propositions designed by OPEC. All what Algeria is willing to offer at this stage is the country’s com-mitment to merely “stabilize the market,” as Algerian Ener-gy Minister revealed in a Bloomberg interview prior to the Algiers meeting. If this approach will be sufficient for other OPEC parties to accept and incorporate into a new plan is rather doubtful.

Libya Libya represents a similar case. Libya’s state officials an-nounced in mid-September 2016 that the North African country will not curb its oil production regardless of an OPEC deal. A country that depends on oil for 95% of its national revenues and is currently intensively dealing with post-civil war state building could have adopted only a singular strat-egy; to boost crude output and secure national income from crude exports.

Libyan officials have thus embarked upon a plan to increase oil output by up to 1 million b/d by the end of 2016 and grad-ually hit the previous levels of 1.6 million b/d of the Gaddafi era. Chairman of the Libyan National Oil Company (NOC), Mostafa Sanallah, said that the production in the first nine

month of 2016 increased to about 390,000 b/d, up from less than 290,000 b/d before oil ports conflict between eastern and western governments had been resolved.

Before the Algiers meeting, Libya’s Envoy to OPEC, Mo-hamed Oun, announced the country’s opposition to the freeze plan. According to Wall Street Journal, Oun reiterat-ed in an interview: “Definitely, we will not agree to a freeze without reaching our quota from before.” In this sense, Libya becomes one of the few countries that is explicitly outspo-ken about its opposition to the freeze plan with a focus on regaining its market share.

There are, however, further obstacles that hinder Libya’s ca-pacity to produce more oil, including the sporadic fighting among its militias in the country’s eastern territories that do not back the presence of an UN-backed unity government that rules from the capital Tripoli. In addition, the continual attacks from ISIS militants on the oil ports have caused pro-duction to decline. The damage incurred on the country’s pipelines, as well, looms a disruptive production of oil for the foreseeable future. Libya thus seems to be making one step forward and two steps back. Agreeing to a freeze in produc-tion is, therefore, clearly not an option for Libya’s oil agenda.

NigeriaOPEC member and one of Africa’s top oil exporters, Nigeria, is also an oil-dependent country that has been struggling to contain its oil crisis over oil price drop and continual attacks on its pipelines by militant groups. The country’s oil output had fallen to 1.56 million b/d as persistent attacks from the Niger Delta Avengers took out some 700,000 b/d, according to government’s official statistics.

According to the month-on-month analysis, since January 2016 crude oil output started falling from the level of 66.49 million barrels, which translated to an average of 2.22 million b/d. In May 2016, the drop in production came as low as 52.34 million barrels, translating to a daily average of 1.74 million barrels. Nigerian-based newspaper, Vanguard, pub-lished an analysis Nigerian Oil Production to Remain Down through 2017, which showed the steady decline in the coun-try’s crude oil output with a negative projection for 2017. The Energy International Agency (EIA) data also confirmed that Nigerian oil production would remain depressed throughout the next year.

Declining oil prospect for the country comes in light of mul-tiple militant attacks in the strenuous oil price environment. Four streams of Nigeria’s oil, including the country’s largest, Qua Iboe, along with Bonny Light, Brass River, and Forca-dos are currently under force majeure. In the view of the country’s oil conundrum, Nigerian Oil Minister, Emmanuel Ibe Kachikwu, cast doubt on any plans by OPEC members to reduce output. In a speech in Lagos in mid-August he



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stated it clearly: “I don’t see that happening.”

Hence, Nigeria is unlikely to abide by a possible freeze plan, given that the country’s current production rates are below desired and its crude exports is seeing a decline as well. Ac-cording to OPEC’s Annual Statistics Bulletin 2016 (Table 1), Nigeria’s crude oil and petroleum products exports reached 2,400 thousand b/d in 2011. The number has been declining further since. Following the oil price drop in mid-2014, Nige-ria’s crude exports recorded another drop to 2,132 thousand b/d in 2015 and there are no convincing signs that the coun-try would be able to recover from it to be ready to accept oil freeze plan scheduled in November.

Although Algeria, Iraq, Libya, and Nigeria have witnessed economic stagnation due to the sluggish oil industry, each country is striding to lift its economy upwards. Oil industry has always been a major source of revenue for these coun-tries, especially in times of price downfalls, economic break-downs, and political conflicts. Curbing oil output, therefore, does not seem as a plausible option for Iraq, Algeria, Libya, and Nigeria.

REGIONAL CRUDE EXPORT RIVALRYCrude export levels, that countries such as Iran, Iraq, even Saudi Arabia have been ferociously trying to expand on most recently, are another indicator that lengthy negotia-tions about production level caps are unlikely to bring tangi-ble results already in Vienna. In the regional dynamics, rival-ry between Iran and Iraq over new consumers and a pricing war between Saudi Arabia and Iran over new oil shipments to Asian markets may pose another difficulty to the plan.

As the mentioned countries are boosting their oil output, their export levels do not seem to have come on the right track yet or simply, as the case of Riyadh shows, have not reached desired volumes. This necessarily implies that there is nothing that could stop these players from adhering to any crude capping agreement.

According to OPEC’s Annual Statistics Bulletin 2016, the exports levels of crude oil and petroleum products in Iran (Table 1) dropped in 2015 to half of what its regional rival Iraq has exported last year. In 2011, Iran’s exports of crude oil and petroleum products stood at 2,978 thousand b/d, slumping to almost 2,560 thousand b/d in 2012. These lev-els witnessed further decline due to international sanctions imposed on the country and in 2014, Iranian crude export hit lower than 1,580 thousand b/d. Following the lifting of sanc-tions, Iran’s export levels started surging again, yet record-ing merely a slight increase to above 1,590 thousand b/d this year. Therefore, from Iran’s national economic perspec-

tive, crude export competition seeks stronger production for the country to be able to reopen its business with former customers and reach out to new markets. In early Novem-ber, Iran’s Oil Minister, Bijan Zanganeh, has announced that the country’s crude oil exports to international markets have started rebalancing by reaching as high as 2.56mb/d in Oc-tober, marking a new record worth more than $80m in direct payments every day. Yet, another decline in exports of 7.5% is set occur as the seasonal demand of crude is low in Eu-rope, and Tehran has so far not yet regained its intended market share on the Asian continent, with exports not ex-ceeding 1.93mb/d, as estimates for November show.

On the other hand, Iraq’s crude oil and petroleum products exports have been steadily increasing (Table 1), despite the country’s vulnerable economy and continual attacks from ISIS militants, as OPEC’s 2016 Statistics shows. In 2011, the country exported 2,166 thousand b/d of crude. This number increased in 2012, reaching 2,425 thousand b/d to then see a slight drop to 2,401 thousand b/d in 2013. Iraq’s export levels stabilized again in 2014 and reached 2,524 thousand b/d, followed by a thrust in 2015 reaching an overall amount of 3,018 thousand b/d. Comparatively, the percentage change in crude and petroleum products export rates from 2014 to 2015 in Iraq recorded a 19.6% boost whereas in Iran stood at 1%. Even though the volumes of Iran’s exports are likely to see an upward trajectory, the pace of this trend will be a decisive factor for Tehran to become competitive with its regional neighbors.

What we are currently witnessing is a silent Iran-Iraq rivalry that will gear up the two countries’ exports and make their submission to an OPEC freeze plan less probable. Bagh-dad’s and Tehran’s calculations and the choice of their oil policy have been necessarily pre-determined by their export volumes and capacities that have been directed to acquire largest possible share for them in new markets.

The significance of the choice of crude export tactics for

Table 1:

Exports of Crude Oil and Petroleum ProductsYear Iran Iraq Nigeria2011 2,978.6 2,166.8 2,400.62012 2,558.0 2,425.5 2,376.22013 1,609.4 2,401.9 2,216.12014 1,579.1 2,524.8 2,169.42015 1,595.5 3,018.6 2,1323.0

Data: OPEC Annual Statistics Bulletin 2016Table: Egypt Oil&Gas



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both Iraq and Iran further increased as Saudi Arabia came to pursue the same plan; i.e. to reach out to new buyers. The Saudi move to offer discounts for its crude shipments to Asian markets has brought both Baghdad and Tehran on alert. It has unleashed a tacit pricing war among the three crude suppliers from the region and reinforced their produc-tion-for-export strategy, which will unmistakably play a crit-ical role in attempts to diminish oil production. Meanwhile, Saudi Arabia has been reported to have raised pricing for December sales of all oil grades to Asia in order to take ad-vantage of a brief increase in demand for Middle Eastern crude.

Furthermore, bringing other oil dependent countries into the picture, OPEC leaders have understood that oil export tar-gets will be strongly imprinted on future success or failure of freeze plan negotiations in November. Therefore, several countries were already preliminary exempted from partici-pating in the freeze deal during the September talks in Alge-ria. Oil producers that have been mentioned to be freed from any binding production cap agreements until now are Iran,

Nigeria, and Libya, but this is so far still a fragile, unbinding proposal for a compromise.

Nonetheless, it sheds some light on the Saudi foreign oil pol-icy approach that is to play a critical role in OPEC negotia-tions in November, just as Riyadh’s view on crude production did back in 2014, when it set straight OPEC’s approach as a whole. Saudi Arabia had most vocally, vehemently, and re-currently rejected all mentioned cases of countries that may be excluded from OPEC oil freeze plan’s obligations. As it is less predictable that Saudi’s intransigence to a full-fledged oil freeze plan would change, any compromising deal re-mains at risk. In fact, OPEC members would be doomed for yet another round of talks about nothing more than ‘how to talk oil freeze in the future.’ Necessarily, any attempts to tackle the crisis of lengthy low oil prices and any agreements to balance out the global oil market may be easily sidelined over implicated global market share struggle, regional ex-port rivalries, and geopolitics of oil.

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FACTORS IN THE GAME B. INTERNATIONAL OIL SUPPLY


Lack of interest in designing a road map for a freeze plan may even come as a purposeful strategy in order to preserve organi-zation’s position globally. The relation between OPEC oil supply on one side and the volume of global crude glut on the other has some important bearings for this explanation. The world has been flooded with crude supply creating a global oil glut prior to 2014 which squeezed the market and plummeted oil prices. But since then global oil supply has been decreasing, most significantly over the past year (Graph 2), from 97.37mb/d in Q4 of 2015 to 96.61mb/d in Q1 of 2016. It reached the level of 95.93mb/d in Q2 of 2016, according to International Energy Agency’s Oil Market Report 2016. This outcome came as a result of lower production rates in non-OPEC countries compared to a year ago. As for OPEC, it has also seen a drop in crude production surplus capacity (Graph 3), yet, in comparison to other international actors, this decline was proportionate to the organization’s global market share and rather related to the identified growing global demand for oil and low oil prices. The US Energy Information Administration chart indicates a consistent reduction in OPEC oil glut since 2010 that saw a re-cord level hitting 3.98mb/d and slurping to 1.3mb/d in 2016. Ris-ing global demand for oil, as the report explains below, has thus had a noticeable effect on the organization’s choice of strategy. What OPEC giants see occurring is that the pressure to curb oil production and global crude supply “may be easing.” In light of this, to put it simply, a freeze plan could not be perceived as the best of possible options that OPEC currently has at its disposal. Provided that it is majorly interested in preserving its global role, what, in fact, seems to be happening at present is that OPEC is striving to opt for a time-buying strategy with some oil freeze di-

plomacy. In light of this, all inconsistencies across narratives that were noted at diplomatic negotiations and a lack of clarity as to what a freeze plan may entail in reality come hand in hand with OPEC’s boosting oil production. Respectively, OPEC’s oil output set another record high in Octo-ber, as Nigerian and Libyan output partially recovered from dis-ruptions, and Iraq boosted exports. According to shipping data and information from industry sources cited by Reuters, supply from OPEC has risen to 33.82mb/d in October, up from a revised 33.69mb/d in September. This is 820,000b/d above the top end of a target output range that OPEC had agreed to adopt in Septem-ber in order to limit supplies. Even more so it is in fact the highest rate since 1997. However, production near 34mb/d would likely prolong the supply surplus weighing on the market, and thus add skepticism about OPEC’s ability to reach an agreement on a pro-duction freeze. Much of the above suggests noticeably that little may be achieved in Vienna. Even if some proposition catches attention of all participants in Vienna, analysts from Commerzbank AG and Citigroup Inc. speaking to Bloomberg rightly warned that simply capping output at current levels - rather than cutting production - would do little to tackle the persisting surplus in global markets, provided that most of the countries involved are already producing as much as they can. OPEC has a plethora of scenarios to adopt from freezing produc-tion to capping output at January 2016 levels to setting production quotas per country. These options, however, can complicate ne-gotiations even more.

Graph 3:

OPEC Surplus Crude Oil Production Capacity

Data: International Energy Agency, Oil Market Report, 2016 Source: Egypt Oil&Gas

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FACTORS IN THE GAME C. INTERNATIONAL OIL DEMAND


Global demand for crude is another key variable which sig-nifies the unlikelihood of an oil freeze plan as the slumping crude prices seem to have led to a considerable increase in oil demand globally. Analysts expect that this changing dynamic will reinstall market balance, according to the Inter-national Energy Agency’s (IEA) Oil Market Report published in July 2016.

Graph 4 shows that international oil demand has seen a steady increase from 2013 to 2016. The years 2013 and 2014 saw merely a slight rise in global demand averaging around 91mb/d to 93mb/d. But following a global oil price plunge in mid-2014, the pace of oil demand geared up reach-ing the levels of around 94mb/d in 2015, and up to 95mb/d in 2016. In Q3 and Q4 of 2016, the oil players have noticed record levels of oil demand hitting as high as 97mb/d, as preliminary statistics show. The decrease in oil prices has evidently been a luring factor for the demand to surge.

Furthermore, the IEA’s report read that the global demand is forecast to rise by a further 1.3 mb/d to 97.4 mb/d by 2017. The majority of the projected upside in 2017 is attributed to Asia, with India’s demand forecast to be the world’s most rap-idly growing next year, rising by 0.28mb/d, closely followed by China. Meanwhile, the demand for OPEC crude is projected to grow by 1.1 mb/d to an average of 33 mb/d next year, which is consider-ably more than estimates of US oil demand rise to 0.035mb/d in 2017, up from the current 0.025mb/d.

Oil demand in some OPEC coun-tries has demonstrated a slightly in-creasing trend in the past two years (Graph 5) with some variations, yet, this change seems to be less relat-ed to oil prices drop as such and more to increasing consumption rates, in particular in the MENA re-gion.

Between 2014 and 2015, crude demand in the OPEC top oil pro-ducing country, Saudi Arabia, was registered at a relatively low level of 4.9%, jumping from 3,163 thousand b/d in 2014 to 3,318 thousand b/d in 2015. Qatar has recorded the larg-est hike of 22% and the UAE had seen second largest upsurge in de-mand of 8.2%. Algeria ranked third with a 7.5% hike. The demand of oil in Kuwait and Iraq showed a slight

increase of 2.6% and 0.8%, respectively.

According to some analysts, the rise in crude demand in MENA OPEC-members is tied to surging consumption over the given period of time. Algeria saw an increase in con-sumption reaching as high as 19.3m tons in 2015, Kuwait’s oil consumption in 2014 stood at 22.7m tons and rose to 23.6m tons in 2015, and the UAE filed consumption hike from 37.6m tons in 2014 to 40.0m tons in 2015.

On the other hand, Saudi’s consumption levels’ increase from 160m tons in 2014 to 168m tons in 2015 does not nec-essarily correspond with the upsurge in domestic demand that could be assigned to consumption boost. It rather re-lates to Riyadh’s crude export strategy that aims to expand country’s target markets to which the kingdom’s crude would be shipped. In similar veins, Qatar’s oil consumption hike from 10m tons in 2014 to 10.9m tons in 2015 is relatively low compared to the country’s massive hike in domestic de-mand. Business strategies of these countries focus on pro-duction that would help to expand their exports, a decisive variable that would greatly impact on their willingness to ad-here to an oil freeze plan.

2013 2014 2015 2016

Graph 4:GLOBAL OIL DEMAND

Data: International Energy Agency, Oil Market Report, July 2016 Graph: Egypt Oil&Gas

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Oil Demand 2014 (1000 b/d)Oil Demand 2015 (1000 b/d)Change

Graph 5:OIL DEMAND IN OPEC COUNTRIES 2014 - 2015

Data: International Energy Agency, Oil Market Report, July 2016Graph: Egypt Oil&Gas

FACTORS IN THE GAME C. INTERNATIONAL OIL DEMAND


Steadily rising global demand for oil thus implies that in-crease in crude production would inevitably follow, which, for OPEC, would further lessen the urgency for setting an oil output cap as initially outlined. As oil demand surge contains new business opportunities, OPEC countries would less like-ly conclude upcoming Vienna meeting with a solid oil freeze agreement. The major oil players have incorporated short-term revenue losses incurred over low oil prices into their long-term strategy planning. Hence, they are determined to keep pumping at full tilt. Establishing one’s position in a vari-ety of markets worldwide at present, would guarantee better prospects and higher revenues for decades to come. As the oil market is projected by some analysts to possibly reach equilibrium within a couple of years, low profits of today may easily translate into a larger market share in the future and

hence multiplied profits.

OPEC countries would favor selling oil for any price in the current market conditions and thus fill a gap that minor play-ers have left behind when they were forced to reduce their expenditure and pause temporary unprofitable investments. OPEC members can afford to grab hold of less profitable ventures, which allows them to expand their crude market shares, because from a long term perspective, these assets may turn into gold mines once oil prices recover. For this to happen, top oil producers would need to ensure that they are deeply enrooted in targeted markets, be it in Asia or Eu-rope. This strategy necessarily calls for assertive policies both within OPEC and globally under which an OPEC oil freeze plan becomes a rather blurred vision.

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OIL FREEZE PLAN NARRATED


Limiting production would, however, bring some indisputa-ble advantages to the global oil market. For some countries, the limit is more essential than for others. All oil dependent economies such as Nigeria and Algeria need a deal to prop up the price of oil, fearing that the barrel price could decline to $20 per barrel if a decision is not made. Even for Riyadh, a freeze plan that would increase oil prices may enhance its national economy, much needed for a country that faces a fiscal deficit of 13.5% of its gross domestic product (GDP) this year. The International Monetary Fund (IMF) says that Saudi Arabia thus needs to sell oil at $67 per barrel to level out its economy, since 25% of Saudi Arabia’s GDP relies on oil revenues.

Saudi Arabia has, nonetheless, been cautious about giving its consent with renewed negotiations. Initially, in April 2016, the kingdom had rejected joining a freeze plan, if Iran was to not to be part of it. According to the latest OPEC talks, some members were suggested to be exempted from limiting oil production due to endured violence of civil wars, insurgen-cy, and sanctions, e.g: Libya, Iraq, and Iran. This proposal was to ease the debate and seek an alternative plan to al-low for a possible agreement that would re-bounce crude prices. The Saudis again counteracted this proposition. Old disputes between Saudi Arabia and Iran resurfaced, when OPEC members gathered in late October to work out de-tails before an official summit. The Saudi kingdom has an-nounced intentions to raise oil output steeply preventing oil prices from recovering if Iran refuses to limit its supply. An OPEC source who attended the meeting told Reuters: “The Saudis have threatened to raise their production to 11 mil-lion b/d and even 12 million b/d, bringing oil prices down, and to withdraw from the meeting.” Saudi intransigence may get a freeze plan discarded, as many before.

Iran, on the other hand, is still saying the country will con-sider capping oil output only when it reaches its threshold, which is 4.2 million b/d. Tehran has countered Saudi ‘should-freeze-now’ requirement with the argument that Riyadh has

increased production by nearly 1 mb/d since 2014 and it is now most kindly and generously offering to cut just 400,000 b/d to take one for the team in order to reach a production deal. The two countries have mastered the game since talks on production limits were first mentioned, and since, Riyadh is ferociously seeking to disenable its potential economic and geopolitical rivals.

The freeze plan narrative has since taken many different forms. In August, Saudi Energy Minister, Khalid Al-Falih, spoke about the kingdom’s position towards a freeze plan in rather vague terms saying that while a freeze would be “positive” for market sentiment, no “intervention of signifi-cance” is required, as global market is rebalancing itself. Similarly, Algeria’s Energy Minister, Bouterfa, has stated in a Bloomberg interview that the most important thing for the meeting with OPEC members is to “stabilize the market pric-es” without making an explicit commitment to support cuts in oil output directly. Other world oil producing countries seem to have adopted similar, vaguely formulated approaches to the proposition. This inconsistency in how major oil players positioned themselves in the debate seems to have reduced the concept of an oil freeze plan to a mere narrative.

The actual original intention to re-balance crude oil prices through a joint freeze plan has come to a point where any de-sign of such a plan would have the desired effect. Surely, the Algiers discussion brought about a 5.3% hike in prices over the weeks following the meeting without a tangible outcome. Similar expectations for Vienna summit are therefore not ex-aggerated. According to latest expressions of willingness by some OPEC members to brainstorm possible alternatives to a freeze plan, crude prices may see a slight rise, yet, this would be merely temporary. Inconsistencies and vagueness spread across oil freeze narratives will likely preclude any viable agreement to be concluded at the next meeting and effectively implemented before the end of 2016.

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CONCLUSION


Geopolitical rivalries, regional disputes, economic competi-tion over market share, and global trends feed into a highly likely scenario that will make it difficult for OPEC to reach an oil freeze agreement in Vienna.

In the view of some OPEC members, any limitations on crude output levels, with the currently rising oil demand worldwide, would incur massive losses to the oil producing countries. However, if any such deal is concluded, its implementation would hit against the wall of competing national interests.

These economic objectives of individual OPEC countries are clearly incompatible, which may generate a dynamic that would likely end up with an unfulfilled agreement and a path towards any viable deal in the future sealed.

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EOG MARKET WATCH - Egypt Oil & Gasnewsletters.egyptoil-gas.com/marketWatch/2016/30-11-2016/... · 2016-11-30 · World’s largest crude oil exporter, Saudi Arabia, has been boosting