Doha oil talks overshadowed by Iran gathering

A gathering in Doha of ministers from some of the world’s largest oil producers to discuss a possible output freeze was overshadowed on Saturday by the European Union’s top-level mission to Tehran.

The Tehran talks – with energy deals top of the agenda – served to underscore the fact that Iran, which has been the source of most of the additional oil on the world market since the start of the year, already has said it will not sign up to a deal to freeze output until after it ramps production up to capacity following the lifting of nuclear-related sanctions in January.

Saudi Arabia, which precipitated the oil price crash over the last 18 months by boosting production to recapture market share, has previously said it would agree to a freeze only if Iran signs up.

On Thursday, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman sounded a warning note, saying the world’s largest oil exporter could boost output from 10.2 million barrels per day to 11.5 million bpd immediately, and 12.5m bpd within six months.

“I don’t suggest that we should produce more, but we can produce more,” he said in Riyadh, according to Bloomberg.

The Doha confab, which is being hosted by the Qatari oil minister and current Opec president Mohammed Al Sada, was originally scheduled for last month but was postponed as Russia tried to broker a deal between Saudi Arabia and Iran.

Even without the Saudi Arabia/Iran stand-off, the history of efforts to coordinate meaningful output limits between Opec and non-Opec producers is one of failure.

“It’s about keeping sentiment positive,” said Amrita Sen, an oil analyst at Energy Aspects. “They will announce a deal of sorts but nothing of substance.”

Russia’s energy minister, Alexander Novak, in Moscow on Wednesday gave a hint of the non-committal communiqué that is likely to result from the talks: “The agreement will not be very rigidly formulated. It is more of a gentlemen’s agreement.”

Suhail Al Mazrouei, the energy minister for the UAE, which was the world’s third-largest exporter in 2014, will attend the meeting, though neither the minister nor the new chief at the state oil company Adnoc, Sultan Al Jaber, has specified what commitment the country might make.

UAE output has ramped up from about 2.8 million barrels per day at the end of 2014 to more than 3.1 million bpd early this year, and the country has a target to reach 3.5 million bpd by 2018.

Among others attending, Iraq, the world’s fifth-largest oil exporter, already has erratic production because of the ongoing conflict within its borders and the severe strain on investment, which in turn has necessitated drastic financial measures, including last week’s move to issue bonds to unpaid oil contractors in lieu of payment. It has been exempt from Opec quotas as it tries to recover and is unlikely to be asked to freeze.

Canada, the world’s fourth-largest exporter, is not attending the talks. Nor are the North Sea exporters, Norway or the UK.

Algeria, Angola, Azerbaijan, Colombia, Ecuador, Indonesia, Kazakhstan, Kuwait, Mexico, Nigeria and Oman are sending representatives to Doha. Iran is expected to send an observer.

Mr Novak’s comments during the process have indicated that Russia’s interpretation of any deal will be fluid, as it was in a previous deal earlier this century.

“The discussion is only about freezing production and not exports,” he said last month, while the Russian pipeline company Transneft announced that it would export 7 million tonnes from Baltic Sea ports this month, up 9 per cent from last month and the highest level in two-and-a-half years.

Russia and Saudi Arabia – which together account for about 30 per cent of world oil exports – also have been competing fiercely for market share in China and other Asian markets.

The talks, which were hatched at the start of the year when benchmark North Sea Brent futures were headed to a post-oil-crash low below US$30 a barrel, seem to have been aimed at staunching the futures sell-off to give the physical market time to move back into balance.

It is not clear how the oil market is poised to take a weak Doha deal.

According to a survey of traders and market analysts by Bloomberg, about half are expecting a deal to be announced.

Brent futures have gained about 43 per cent since hitting their lows in January and closed on Friday just above $43 a barrel, down from a year-to-date high of $44.69 earlier in the week.

The gains have been aided by talk of the freeze but also by real improvements in the market.

“The global oil market is rebalancing, freeze or no freeze, because of a drop in US supplies and rising global demand,” said Francisco Blanch, a commodities strategist at Bank of America Merrill Lynch.

With inventories coming down this year, “we still project oil prices to trade on average back above $50 a barrel next year,” Mr Blanch says, though conceding that failure to reach a deal, or even a weak deal, could cause an immediate sell-off.

Most of the major independent forecasters also are expecting that the world crude glut will continue to abate through this year following the sharp declines in output in the US and Latin America and steady, if lacklustre, demand growth.

The International Energy Agency said last week that it expects in the second half of this year a sharp slowing of inventories, which would be the most reliable indicator that the market is heading back toward supply-demand equilibrium.

Meanwhile, the European Union delegation to Tehran was led by its top envoy, Federica Mogherini, who was accompanied by seven EU commissioners, including trade and energy.

The EU said that the lifting of sanctions paved the way to boost EU-Iran trade – especially energy – back towards the €12 billion level from before sanctions, which then dropped to €6.5 billion euro by 2014.

Already there has been a scramble by energy companies seeking deals to help Iran rehabilitate its oil and gas sector, while Iran has been offering new, more attractive contract terms.

Last week, for example, during the visit of the Italian prime minister Matteo Renzi, the Italian company Saipem and Iran’s Razavi Oil & Gas signed a preliminary deal to develop the Toos gasfield.

But a sticking point has been international banks, which Iranian officials have complained have been slow to finance trade and other deals with Iran. The EU mission is aimed partly at giving further confidence to the financial community that trade is indeed opening up.

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