Wednesday, November 30, 2016

OPEC Reaches Deal to Limit Production, Sending Prices Soaring

Photo
Khalid al-Falih, center, the Saudi energy minister, at the OPEC meeting in Vienna on Wednesday.
CreditChristian Bruna/European Pressphoto Agency
VIENNA — After years of trying fruitlessly to prop up energy markets, OPEC on Wednesday finally reached a consensus on production cuts, sending oil prices soaring. The problem is, the euphoria may not last.
With prices still at less than half the levels of two years ago, all 14 members of the Organization of the Petroleum Exporting Countries agreed this fall to lower collective production. But they could not figure out how to spread out the cuts among the countries.
The path to consensus has been complicated by Saudi Arabia and Iran, whose longstanding mutual enmity encompasses religious, political and economic competition. When it comes to oil, Saudi Arabia, OPEC’s top producer, has fought to maintain its market share while Iran has worked to protect its nascent comeback as a power broker in the cartel, a role it lost in recent years under nuclear sanctions.
They overcome their differences on Wednesday, with OPEC deciding to cut production next year by about 4.5 percent, or 1.2 million barrels a day, according to Mohammed bin Saleh al-Sada, the Qatari oil minister, who is running the meeting. It will be the first cut in eight years.
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With the prospect of less pumping, oil prices, which began rising earlier in the day in anticipation of the deal, were up more than 7 percent, to nearly $50 a barrel. Rising prices could provide a lift to the troubled economies of oil-dependent nations like Nigeria and Venezuela, as well as bolster the fortunes of smaller American energy producers that have been shaken by the weakness.

What’s the Current Price of Oil?

Brent crude, the main international benchmark, was trading around $50 a barrel on Wednesday.
The American benchmark was at around $50 a barrel.
The optimism, though, may soon be tempered.
The deal is contingent on the cooperation of non-OPEC countries, most notably Russia. OPEC has said that Russia agreed to participate, but Moscow is notoriously hard to predict.
A recent production frenzy creates another wild card for the deal.
While both Saudi Arabia and Iran have vocally supported higher prices, their national oil companies have been making deals in Asia and filling tankers as quickly as they can leave port. Saudi production has increased to well over 10 million barrels a day, while reductions in domestic consumption have left more available for export. Iran, relieved of nuclear sanctions, has gone on its own selling spree in India and started production in new oil and gas fields.
Other OPEC countries have followed, increasing production in recent months. The race to pump more is taking several of the cartel’s largest members to the brink of their production capacity.
The intense competition makes OPEC’s new plan less meaningful — part of the broader piece of the industry dynamics that means the price increase could prove temporary.
The size of the cut is fairly trivial in a 96-million-barrel-a-day marketplace that remains oversupplied. Should prices rise in the next few weeks, American shale producers are likely to drill and complete more new wells, which would add supply to the global market and depress prices in 2017. And, if history is any guide, even a modest agreement can be breached by cheating.
“If higher prices bring higher output, prices will not remain up for long,” said Jim Krane, a Middle East energy analyst at Rice University. “It won’t be long before we’re back where we started.”
Two months ago, the cartel surprised world energy markets by agreeing in principle to trim production by up to 700,000 barrels a day from current levels of slightly more than 33 million barrels a day. The move by OPEC signaled a significant change of course for Saudi Arabia.

Oil Prices: What’s Behind the Volatility? Simple Economics

The oil industry, with its history of booms and busts, has been in its deepest downturn since the 1990s, if not earlier.
To undercut higher-cost Western players, the powerhouse producer had allowed oil prices to collapse, from more than $100 a barrel, to below $30 earlier this year. With its finances coming under increasing pressure, Saudi Arabia’s new royal government said it would return to a more traditional effort of managing prices by controlling production.
But the cartel’s words and actions did not initially dovetail. The production and export frenzy in Iran has been accompanied by increased activity across much of OPEC.
In the midst of a civil war, Libya has more than doubled oil production since August, to 600,000 barrels a day; it hopes to raise output an additional 300,000 barrels by early 2017. Iraq has expanded production by 300,000 barrels a day since the summer. Nigeria has pledged to increase oil production to 2.2 million barrels a day by the end of the year, from 1.9 million.
“The Saudis have always feared they would be left carrying the burden while the other members cheat, said Michael C. Lynch, president of Strategic Energy & Economic Research and a former adviser to OPEC.
The biggest issue, however, has been the Saudi-Iranian rivalry, as has been the case many times in OPEC’s turbulent history.
Riyadh has insisted that Tehran should contribute to the move to bolster prices. Iran is trying to reclaim the global market share, and the clout in OPEC, that it lost in recent years under Western sanctions tied to its nuclear program.
Saudi Arabia and other Middle Eastern and African producers — particularly Angola, Iraq, Kuwait and Nigeria — took advantage of Iran’s troubles by raising production levels to serve its old customers. At one point, Iran threatened a retaliatory naval blockade of the critical Gulf choke point of the Strait of Hormuz, a move that could have paralyzed the economies of Saudi Arabia, its neighboring allies and much of Asia and inflamed geopolitical tensions.
Now Iran is coming back fast.
Since many sanctions were lifted in January, Iran’s crude oil production has risen nearly a third, to about 3.7 million barrels a day. Having achieved the goal of returning to pre-sanctions levels, Iranian officials want to take production capacity higher still, toward 4.8 million barrels a day by 2021.
“Iran’s influence in OPEC, and indeed in the region, has been growing since the lifting of nuclear-related international sanctions,” said Bhushan Bahree, an OPEC analyst at IHS Markit, a research company. “Its oil output has grown rapidly this year, and Tehran is actively trying to attract foreign companies, capital and technology to raise oil and gas production in the years to come.”
Iran is beginning to negotiate deals with outside companies for the capital and technological expertise it needs to reach its production goals.
Officials have already reached a preliminary agreement with Total to develop a giant Gulf natural gas field that Iran shares with Qatar, and are discussing energy deals with Royal Dutch Shell, the Anglo-Dutch giant. Nearly 50 oil and gas projects may also be opened to foreign investors.
Iran’s ultimate success at recovering its old glory is uncertain.
During the presidential campaign, Donald J. Trump promised to rip up the nuclear deal with Iran negotiated by the Obama administration and other world powers. And even if other countries refuse to follow Mr. Trump’s lead, persistently low oil prices could deter foreign investment.
“There is a lot of uncertainty,” said Homayoun Falakshahi, an Iran analyst at Wood Mackenzie, an energy consultancy.
The rivalry with Saudi Arabia complicates matters further.
Some energy analysts say the Saudis pushed the idea of a cut, in part thinking that Iran had reached its production limits and would not be able to fight for supremacy in the Asian markets for long. In the days before the OPEC meeting, Iran tried to negotiate an exemption from any output cut.
The competition extends beyond markets. Saudi Arabia and Iran are also playing an increasingly deadly political game, battling for power in Syria, Yemen and elsewhere in the Middle East.
The specifics of the OPEC deal give Saudi Arabia and Iran reasonable room.
Saudi Arabia is taking a considerable hit, agreeing to cut by 486,000 barrels a day, the largest chunk of the total deal. But the Saudis would normally cut back substantially in the winter, when they burn less oil to generate electric power for air-conditioning. The country’s output, too, remains at historically elevated levels. Iran faces a ceiling that is about 100,000 barrels a day higher than what analysts estimate the country is now producing.
Adherence to the deal also isn’t necessarily a given. Three big and reliable Persian Gulf producers — Saudi Arabia, Kuwait and the United Arab Emirates — account for more than 60 percent of the overall cuts. But the rest come from other producers who may not adhere as closely to their limits.
“This is a great headline number,” said Jamie Webster, a fellow at the Columbia University Center on Global Energy Policy, who was observing the meeting. But considering the “need to secure cuts from non-OPEC and that there need to occur big contributions from countries that don’t have a great history of compliance, it starts to look smaller,” he said.
Correction: November 30, 2016 
An earlier version of a photo caption with this article misspelled the name of the oil minister of Saudi Arabia. He is Khalid al-Falih, not Khaled al-Falih.

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