Accord on Output Cut
End of Oil War
September 28 marks a historic day for oil market. On the sidelines of the 15th Ministerial Meeting of International Energy Forum (IEF) held in Algiers, OPEC ministers attending the 170th ( Extraordinary ) Meeting of the OPEC, reached basic agreement and opted for an OPEC-14 production target ranging between 32.5 and 33.0 mb/d, in order to accelerate the ongoing drawdown of the stock overhang and bring the rebalancing forward. That would bring new life into the oil market which has been battered by oil price crash since mid-2014.
An important aspect of this breakthrough was that Iran is exempted from the production cut scheme. The Islamic Republic is allowed to bring its production back to the pre-sanctions share of 4 mb/d.
This historic agreement, which was the first consensus among OPEC member states in eight years for reducing output, was not achieved easily. It faced obstructionism on several occasions. In the end, that was Iran’s proposal which fellow OPEC members agreed upon.
In the previous OPEC ministerial meeting, Iran’s Minister Bijan Zangeneh had said that the idea of oil output freeze would not help strengthen prices and manage the market. The Iranian minister had suggested the revival of OPEC quota system. Zangeneh’s proposal faced stiff opposition from Saudi Arabia. But in the end, Iran’s petroleum minister’s words were accepted.
OPEC Contribution to Price Stability
Speculation was rife about oil market conditions before the IEF ministerial meeting started work in Algiers. This IEF and its biennial meeting provide a venue for producers and consumers to exchange views on energy issues. In the Extraordinary meeting of the OPEC conference, all officials from the member states of the Organization of the Petroleum Exporting Countries tried their best to make contribution to a final agreement.
Algerian energy minister Noureddine Boutarfa said everyone in OPEC agreed that the market was badly oversupplied and the situation had worsened since the last OPEC meeting in June.
"Credible and significant action is needed to help the market rebalance… One fundamental aspect is that OPEC production should be significantly below the level of August. The second is that the effort must be shared out."
"Third is that any agreement should be limited to the time it takes to reabsorb oil stocks. And the fourth is that the action should be credible in the eyes of the market and verifiable," Boutarfa told French-language Algerian daily Liberte.
These remarks came against the backdrop of a promise by Saudi Energy Minister Khalid al-Falih that his country would support any decision that would help stabilize oil market.
Before leaving for Algeria, Zangeneh said: “In the status quo, investment in oil has fallen sharply and this trend will harm consumers in the long-term.”
Moreover, remarks by some OPEC member states and their expression of hope for an agreement pushed up prices.
The United Arab Emirates’ energy minister, Suhail Mohamed Al Mazrouei, said for his part: “For us in the UAE, we are for a decision. We think a freeze will help if it is agreed. We hope that all are going to agree.”
Nigerian Minister of State for Petroleum Resources Emmanuel Ibe Kachikwu said “surely there will be” an accord.
OPEC plans to hold its next formal ministerial meeting in Vienna.
Venezuela’s Oil Minister Eulogio Del Pino warned that by December 2016 prices may tumble below $20 if no deal is reached. Caracas has been grappling with 700% inflation.
Due to these remarks, the oil market became hopeful of an agreement about oil production.
When the OPEC meeting was going on in Algiers, Angus Nicholson, a market analyst in Melbourne at IG Ltd said: “There’s skepticism creeping in as to whether there will be an agreement at this meeting,” said. “Still, there seems to have been some very strong groundwork laid for a possible deal in the coming months. There is a very significant psychological anchor for oil at around $45. It always seems to come back to that level.”