OPEC Solidarity to Guarantee Collective Interests

Youssefi told Shana that attaining the pre-sanction production level is Iran’s natural right. “All oil exporters are somehow in the same boat and they are advised to follow collective interests rather than choosing the option of sabotage.”

“Algeria session should be considered consisting four scenarios: The first scenario features producing countries attending the session may decide to cut current production ceiling. Though under present conditions, it is the best and most influential scenario but it is unlikely.”

“The second scenario is that the producers may decide stabilization of the production level; however, due to ambiguities on table, including ambiguity that stabilization based on which level of production and also special conditions of such countries as Libya, Nigeria and Iran, it will be unlikely that the producers would in the time left to the session the producers will reach final agreement on such a decision with respect to the ambiguities underway. The third scenario many be a new decision and failure of the session. And the fourth scenario many be a case in the midway between the second and third scenarios: The session will be held and the participants will issue a general final statement without any detail. It will not reveal whether the producing countries attending NAM will suffice to the decision not to raise production level and launch further cooperation.”

He said the fourth scenario seems more likely than others. “Of course, the fourth scenario does not make much difference with failure of the session. But since it will take one positive step forward than the former session in Doha and makes decision making more likely in the future, it can be taken as positive, checking further destabilization of prices.”

The expert went on to comment that the idea of the Algeria session was raised early August when prices started falling for two consecutive months. The OPEC basket of crude, which was sold for 38 dollars a barrel prior to the announcement that the session will be held, rose to 45 dollars a barrel, he added.

The expert referred to such factors sparking oil price hike in August and early September: Zero growth in number of active drilling rigs in the US oil sector, halt in rising level of crude  and oil product storage in the US and other developed states, continued fall in oil production of the non-OPEC states, especially the US shale oil, cut in part of the oil production in the Mexico gulf due to storm and North Sea due to the repair and maintenance operations, continued attack of insurgents on oil facilities in the Niger delta , and continued failure to supply Nigerian oil, and improvement of condition of stock holders in the futures market.

In general, the oil freeze idea, raised again, left positive impact on the prices, said Youssefi, adding that major portion of the oil officials of the producing states have expressed optimism in positive outcome of the session in stabilizing the market and even Saudi stance has been moderated to some extent compared to that in the session in Doha in April, commented the expert.

“As far as impact of the Algeria meeting on the oil market is concerned, it should be said it depends on the result. Under conditions when the market is in the surplus condition and the inventories’ level is at a high level, undoubtedly, the positive results will check further fall in the prices; in case of its failure, it will leave double negative impact on the prices,” warned the expert.

Youssefi said based on estimates, supply surplus is less than 1,500,000 bpd. “The figure is times less than the 2015 average, which was about two million bpd. Undoubtedly, current level of production’s stability will leave the surplus in the market persisting. It will be however at a level lesser than that in 2015 and also in the first half of 2016. Stabilization of production will however check destabilization and lack of further stability of the prices, cutting short the time of market reaching stability.”

The expert said for the time being, any planned or unplanned fall in the production will encourage price improvement. “If certain OPEC states like Saudi Arabia, Iraq and the UAE, that increased their production two years ago, and won share of Iran, Libya, Nigeria and Venezuela in the market, are committed in production cut and restoration of the market share, undoubtedly, it will have very positive impact on prices.”

But the main point is that the countries are by no means ready to take such a move and any insistence on the point, though being legally defendable, is vain in nature and will bear no fruit for the countries losing their share in the market.

Iran’s regaining its pre-sanction share in the market is its natural right and almost all producers admit it, commented the expert. “Based on the statistics available, Iran has been able to raise its oil production by about one million bpd and getting close to the level prior to sanctions; so, there is more possibility for engagement and cooperation of Iran compared to the past.”

Taking part in the session and setting conditions that production should not go higher than a level, can end up in market stability, he added. 

Saudi Arabia’s insistence that Iran should join the project of stable production is nothing more than a political decision, made by political officials outside petroleum ministry of the country, said Youssefi, adding that Saudi Arabia is in desperate position in facing Iran strategically in the Persian Gulf and especially in Syria, Yemen and Iraq. So, since it is under pressure due to severe decline in oil revenues, the country tries to put Iran under pressure and create obstacles on the way of Iran’s return to the market. 

Neither Saudi Arabia nor Russia can raise their production capacity now, said Youssefi, adding that Russian production is predicted to start downward trend as of 2016 regarding falling prices in the past two years and also sanctions issued against the country. “Though no such a thing happened in 2016 and its production has been fixed in 10,250,000 bpd since January 2016.”

Russian production is expected to start falling as of 2017 and on the other hand, Saudi Arabia will go to a level higher than 10,580,000 bpd, said Youssefi, adding that many experts believe it is maximum level of  production of the country and it cannot raise further.

Practically, deciding or not deciding to stabilize production is not much important for Saudi Arabia and Russia and they may even oppose the idea because they cannot produce further, so they will force the countries that plan increasing the production, according to the expert.

Youssefi said return of Libya and Nigeria to the oil market is a threat. “One of the issues that threaten the market is return of that portion of the production that was discarded from the market without any planning and major portion of it lies in Libya and Nigeria. The two countries enjoy the capacity to increase the production in case of improvement of the political stability.”

“Undoubtedly, regarding higher level of production and exports of Saudi Arabia compared to that of Iran, it will suffer the most from weakening of the prices. But it should be considered that all the oil producers are somehow in the same boat and they are advised to think on more cooperation rather than inflicting harm on the rival. They should look for a solution that will serve interests of all.”

Youssefi refered to continued omission of the quota system in the OPEC and said the OPEC quota system, let’s say what OPEC did in the 1980s and 1980s , was unofficially put aside in 2005 and 2006 and then OPEC no longer used the word quota in its statements and instead it used production target.

He imagined that return of the quota system in the past form will be unlikely. “This is firstly because production of certain members has undergone drastic changes; on the other hand, certain members like Libya and Nigeria produce less than the production capacity in the past few years; most importantly, because OPEC decisions, especially decision for rationing production is completely political for the members and under present conditions, when political challenges between Iran and Saudi Arabia is in the zenith, it will be unlikely there will be any agreement in that connection.”

To the end of his remarks, Youssefi said producers should in the Algeria session focus on the current and short-term issues of the market. “Rising the topic of quotas will only raise problems; on the other hand, that’s a meeting that is to be attended by the OPEC and non-OPEC members and it cannot be hence called an OPEC session.”

The expert concluded that re-creation of the production quota mechanism will be better be raised in the ordinary OPEC session. “Of course, definitely a fresh mechanism should be defined. It should envision a status for the non-OPEC producers as well.”

Translated by Behnaz Hosseingholipour