Although the Doha meeting of oil producers did not end in an accord, after an initial plunge oil prices ended the week at just over US$45 per barrel on Brent – higher than the pre-Doha expectations. This reflects tightening of supply from various quarters, including the temporary loss of up to 1.8 million barrels per day during the Kuwait oil workers’ strike and the downward revision of Energy Information Agency forecasts for US crude production to a decline of 0.8 million bpd this year and another loss of 0.6 million bpd next year.
However, there were recriminations after Doha from the Russian energy minister, Alexander Novak, and the Venezuelan minister, Eugenio Del Pino, that Saudi Arabia had reneged on a promise to go along with a proposed freeze. They asserted that Ali Al Naimi, the Saudi minister of petroleum and minerals, was having to toe a line set by Prince Mohammed bin Salman, the deputy crown prince, of no Iran, no freeze.
But let us take the perspective of the Saudi minister himself, who always said that every Opec country and Russia had to join the freeze to show good faith. He has had decades of experience with Opec “agreements”, as minister and during a very long career with Saudi Aramco, starting as an office boy in 1947.
Mr Al Naimi was the chief executive of Aramco in the 1980s when Opec pegged prices and had official country quotas. He witnessed how producers would agree to limit output, then blithely ignore any quota on the assumption that Saudi Arabia would defend the price by acting as the “swing producer”. He would also well remember how the supply disruptions brought on by the Iranian revolution and the Iran-Iraq war at the start of the decade multiplied oil prices to levels that accelerated development of North Sea offshore oilfields and non-Opec production all over the world.
Through the first half of that decade, Saudi Arabia “defended” the official Opec price, first at $34 per barrel and then at $32 per barrel, by reducing its exports as non-Opec production boomed and many cheating Opec members ignored their quotas to maximise revenue at the high prices. In the course of all this, Saudi net exports shrank from 9.5 million bpd in 1980 to less than 1 million bpd at one point in 1985.
Mr Al Naimi would also recall all the failed emergency Opec meetings called in 1986 during the price war initiated when Saudi Arabia introduced “netback” contracts, which guaranteed refiners a margin on crude purchases. In fact, he had a major role in coming up with the netback formula, which quickly restored Saudi volumes.
The Saudi minister also could not have forgotten that the August 1986 accord was struck with oil prices in single digits only when a deal between Iran and Saudi Arabia led Opec to return to observing production promises. King Salman, too, must remember how it was necessary to hold producers’ feet to the fire for nine months to get the unanimous 1986 agreement, because oil and Saudi Aramco have always been his bailiwick within the Saudi sphere of influence.
Fast forward 30 years and you still have the two Saudi veterans of the 1986 price war, but a whole new cast of ministerial characters from the rest of the producing world who insist “it’s all so simple: you just freeze production levels to restore a fair price for our valuable exhaustible resource”. Of course, they add, “Iran needs to be exempted to restore its pre-sanctions exports”, and individually they make a mental note that their own situation is secretly exceptional.
The policymakers of the kingdom will have sensed this attitude in the way that self-assessed production figures appear to have been inflated ahead of an anticipated freeze.
The Opec Secretariat publishes two sets of output figures in its Monthly Oil Market Report, one based on filings by members and another from “secondary sources”, because members’ misinformation has always been a problem. Everyone knew that any freeze would be based on the January high-water mark in Opec production, about 32 million bpd, according to a variety of reliable sources. Is it then any surprise that the self-reported figures came in at just over 34 million bpd?
Iraq claimed 4.8 million bpd when secondary sources said 4.4; and recent official export claims add up to 4.3 million bpd, while this writer’s Iraqi sources says the figure is 3.8 max, but ask for anonymity.
Iran, likewise, prepared for the freeze in citing about 3.4 million bpd in January and last month when in fact it started the year at 2.9 million bpd.
Even Venezuela, whose minister was a prime organiser of the Doha meetup, inflated its January production by 300,000 bpd to create wiggle room. Russia, a major force behind the freeze, has been ramping up its output and threatening more while blaming Riyadh for the plunge in oil prices immediately after Doha.
Mr Al Naimi was painted into a corner when all the other producers ganged up on him in Doha. The others claim he was overruled by Prince Mohammed, but more plausibly he was simply pursuing the “no exceptions” line, which both he and the higher Saudi authorities have consistently taken.
Better to cook things a little better ahead of the regular Opec meeting in Vienna on June 2, killing off more US shale and other high-cost non-Opec producers in the process. And, the Saudi veteran might quietly observe, $45 on Brent is probably just about right for restoring the centre of gravity of the oil world to Opec, particularly the Gulf region.
Jim Crawford is the managing director at Sharjah-based Inter Emirates General Trading Company.
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