With the price of oil on a slow bounceback ahead of the OPEC meeting in Doha and Saudi Arabia on a diplomatic charm offensive that has taken King Salman to Cairo and Ankara in a blaze of positive publicity, Sunday’s meeting in Doha could well be the cherry on the kingdom’s cake.
The much discussed possibility of a freeze has helped to stabilize and indeed boost the price of oil and with at least 15 countries attending, including non-OPEC member Russia, there is a strong possibility that a deal could be concluded.
And, with a glut of somewhere in the neighbourhood of two million barrels a day on the market, there is no question that a freeze to January, 2016 levels would be helpful. What needs to be borne in mind, however, is that those levels were at near record highs anyway so a freeze will have little impact on producers and, for the time being, on the market glut.
But if such a deal is reached, it will not include Iran, something that deputy crown prince Mohammed bin Salman and his energy minister Ali al-Naimi knew was not going to happen anyway.
As Jason Tuvey, Middle East economist with Capital Economics told me “the Saudis are moving a step closer to agreeing a deal that would exclude Iran,” adding “whether people stick to it is a different matter.”
The Saudis, understanding full well that they cannot stop the Iranians from pumping and exporting oil, have shifted seamlessly to the next best case scenario which sees OPEC and potentially Russia agreeing to freeze output.
And they will take satisfaction knowing that Iran’s close ally Iraq has already come out in favour of an agreement. On 12 April, just five days ahead of the Doha meeting, Iraq’s OPEC governor Falah Alamri signalled his support for an output freeze saying “this is the only way” to boost crude prices.
Meanwhile, one target of the Saudis, American fracking, is really starting to feel the pain. US banks have lost faith in the idea that the fracking industry can ride out low oil prices, with key lenders dramatically slashing credit lines. As Bloomberg notes in a 13 April article:
“It’s a tacit acknowledgment that energy prices aren’t coming back, and represents an abrupt turnaround from last year when banks were lenient on struggling drillers in the hope that better times were coming.”
That in itself represents a huge win for the Saudi strategy to protect its market share from unconventional crude. As well, a freeze agreed in Doha will ease the disgruntlement of those OPEC members, and there are many, who are seeing their economies very badly damaged by the low oil price scenario, which, after all, was orchestrated by the Saudis.
A deal would help stabilize prices above $40bbl, putting an end, for a time at least, to fears that Saudi Arabia was prepared to let prices drift ever downward where, as recently as 18 January, the price dropped below $28 bbl. It goes some way to soothing the anxiety of struggling OPEC members like Venezuela which is on the brink of economic collapse.
As for the Iranians, their energy minister Bijan Zanganeh comes into the meeting having already firmly rejected Saudi demands to throttle back on production while at the same time knowing an agreement that freezes production and stabilizes or indeed increases prices benefits his country. “It’s a no lose situation for the Iranians, “ says Jason Tuvey, “the only way Iran loses is if there is no agreement.”
And given the skilful way that the Saudis are playing the energy game, isolating Iran from other OPEC members including Iraq while wreaking havoc with American fracking, the most likely outcome is a freeze. Should it come, agreement in Doha will serve to confirm that Saudi Arabia’s oil strategy, often questioned by pundits as prices continued to collapse, was the right one all along.
Even if a deal does not happen and oil prices begin to slide again, it is the kingdom’s regional foe Iran, anxious to get its oil to the world market after years of sanctions who will feel the pain most deeply. So deal or no, Doha looks set to nicely cap a week of diplomatic triumph for Saudi Arabia.
Follow Bill Law on Twitter @BillLaw49
