The Opec+ alliance spectacularly failed to come to an agreement during a series of meetings in Vienna which culminated on 6 March. Opec’s aggressive negotiating tactics – 1.5mn b/d additional cuts with “no Plan B” – ultimately backfired, as the 23-member coalition failed to reach an agreement.
Opec ministers maintain that the alliance can be resuscitated through further meetings, but as MEES went to press no date had been set. Moreover, UAE Oil Minister Suhail al-Mazrouei confirmed to reporters immediately after the meeting that the existing production curbs expire at the end of March. “We did not decide on cuts, or any deal related to that…we did not decide on the cut to be continued, which is the rollover, or on any additional cut,” said Mr Mazrouei.
OUTPUT SET TO RISE?
The big question is how the producers will react now that they are released from their Opec obligations. Mr Mazrouei said “we believe in Opec, as the UAE, that the market needs additional cuts” indicating that he will not be tapping into the country’s more than 500,000 b/d spare capacity.
That said, he didn’t respond to a question about whether the UAE would be increasing production in April.
His Kuwaiti counterpart made no comments to reporters when leaving the Opec secretariat. However, non-Opec kingpin Russia’s oil minister Alexander Novak said that Opec+ countries will be free to produce without restriction from 1 April.
Saudi Arabia’s response to this setback will be crucial. The kingdom is sitting on more than 2mn b/d of spare capacity and if it chooses to get in an arms race with Russia then it could flood the market.
With the coronavirus-driven demand shock potentially about to be met by a wave of new production, rather than the widely expected deepening of cuts, how did it come to this?
REACTIVE, NOT PROACTIVE
Opec came into the week with a clearly demonstrated preference for deeper cuts, while Russia looked reticent to commit. But Opec’s strategy always appeared to be reactive rather than proactive, as it scrambled to put a floor under prices, in stark contrast to the consistent stance from the obstinate Russians.
Opec maintains that its official position is the pursuit of market stability and that it acts according to fundamentals. It does not chase prices.
But after Opec’s 5 March meeting resulted in a recommendation for Opec+ to deepen cuts by 1.5mn b/d (1mn b/d to Opec and 500,000 b/d to non-Opec) for Q2, before returning to Q1 levels for the remainder of 2020, Brent settled below $50/B for the first time since July 2017.
A matter of hours later, Opec released a fresh announcement that it recommended the 1.5mn b/d cuts to be extended throughout 2020. Such a switch after the meeting had concluded was remarkable and the statement merely cited Opec members’ commitment to “work together to restore oil market stability.” The announcement followed an evening meeting at Vienna’s Park Hyatt, where the Saudi delegation stays.
Delegates told MEES the following morning ahead of the 6 March Opec/Non-Opec meeting that Opec felt that longer, deeper cuts were required to provide the market with requisite confidence. One explicitly said that Opec was moved to act after seeing the market reaction to the earlier announcement, a clear indication that prices – rather than fundamentals – drove the decision.
One delegate confirmed that the evening talks were unplanned, and given the venue, the clear (and predictable) inference is that the change was driven by Saudi Arabia.
RUSSIAN ROULETTE: RUSSIA WINS?
The problem with this aggressive approach was that it appeared to box both Opec and Russia into corners. Iranian energy minister Bijan Zanganeh said on 5 March that there was “no Plan B,” while it appears that Russia felt aggrieved at perceived efforts to coerce it into deeper-than-planned cuts.
After the 6 March meeting ended without an agreement, Mr Mazrouei put the blame firmly at Russia’s feet. “Opec had put together a recommendation, the 1.5mn b/d…non-Opec obviously, especially Russia, needs more time for them to think about that. They are not ready today to sign, so we need more time. I don’t know how much time, I think now that Russia needs to think about it and hopefully we could reconvene, don’t ask me when, whenever the non-Opec countries are ready and hopefully get a decision.”
The issue of Russia needing more time was also brought up by Mr Zanganeh afterwards. “Some of the members were in a situation where they couldn’t decide. It needs time to cool down and then decide. During the next few weeks, we need to have more consultation and make a new decision,” the Iranian minister said, adding that “I believe the market needs a new cut, and this new cut needs more consultation without any tension to reach a new agreement”.
DEAL STILL ON THE TABLE
All parties maintain they are committed to continuing to work together despite the failure to reach an agreement this time. Opec members remain hopeful that a future production agreement is possible.
Mr Mazrouei said “I am hopeful that we will come back before June, hopefully when Russia realizes that we need to do something…the majority of us are ready to take action.” The UAE minister added that Russia’s recommendation to Opec+ was for an extension of the existing cuts “but that recommendation is not enough, we need extra measures and we believe that we need to give Russia some more time. Hopefully they will come back.”
The initial Opec+ agreement was reached in December 2016 and production cuts have broadly continued over the subsequent three and a bit years. Until now. The next few week’s will be essential in determining whether the alliance can continue as a meaningful entity.