If one goes by the market buzz, the Organisation of the Petroleum Exporting Countries (Opec) may be inching close to an output freeze deal.
Although the comments of the Saudi Energy Minister Khalid Al-Falih late on Thursday underlined that rather than making physical intervention, the fundamentals of demand and supply needed to be allowed to take care of the oil markets did dampen some enthusiasm, yet, the overall sentiments today seem much more positive than at the beginning of the month.
Markets are hopeful that Opec would act.
The very talk of a meeting of stakeholders to discuss the crude market scenario and evolve a joint response has seen the crude markets rally. Prices have gone up by almost 20 per cent from the low $40s registered at the beginning of the month. Indeed there are reasons for the optimism in the air.
From day one, when the very idea of output freeze was floated earlier this year, Iran has been crucial to a deal amongst the producers. The Saudi position was clear – then and now – it would only commit to any such arrangement, provided all stakeholders, Iran included, also agree to contribute.
Now for the first time, signals emanating from Tehran appear positive. As per a Reuters report, citing sources from within Opec, Iran has indicated it may support joint action to prop up the oil markets.
Behind the scene, diplomacy has definitely helped encourage Tehran to join the initiative.
In order to rally support for an output freeze deal, Venezuelan Oil Minister Eulogio Del Pino toured oil-producing countries including Saudi Arabia and Iran.
The change in Iranian position, if at all, could be cited to one major fact. “Iran is reaching its pre-sanctions production level soon and after that it can cooperate with the others,” a source familiar with Iranian thinking after del Pino’s visit to Tehran told Reuters.
Simple arithmetic is also contributing to the possibility of an agreement. Already the Opec battle to regain market share has yielded the desired, positive, results. In 2014, when Opec opted to go for the global market share battle, it was in a different perspective. Opec’s market share had reportedly fallen then from 32.7pc to 32.3pc whereas the share of Saudi Arabia in the global oil production had fallen from 10.6pc to 10pc.
That stands altered now.
The Saudi share in the world oil production has risen to almost 11pc over the last two years and its daily output has hit record levels in July, touching 10.7 million barrels a day – with analysts opining it could even surpass that in August.
Saudi Arabia’s crude oil exports in the first six months of 2016 also averaged 7.52m bpd, compared with 7.46m bpd in the same period last year, JODI data show.
Production for the period climbed to an average 10.29m bpd from 10.14 million barrels a day. The extra Saudi output in June was beyond the volume needed to cover the seasonal summer increase in domestic crude consumption.
Other Opec nations are reportedly also producing at close to capacity. Iran is closing in on the pre-sanctions level. And in the meantime, Iraq is also reportedly asking energy companies to pump more, ahead of the September meeting. Iraq also plans to increase exports from Kirkuk by 150,000 barrels per day and a Nigerian militant group, which has been disrupting production in the Niger Delta, has said it was ready for a ceasefire and dialogue with the government.
Another interesting fall out of the market glut has been a drop in the US shale output. Thanks to the glut in the market and the fall in oil prices, the US oil production has fallen to the levels registered some two years ago and is projected to continue to go down even further.
In the meantime, Russia has also increased its output to reach 272.4 million tonnes (3.1pc increase year-on-year) making it a post-Soviet record.
With high output levels and markets share of ‘low cost, efficient producers’ consolidated, major stakeholders don’t lose out much on the output freeze agreement. Hence the possibility of an agreement in Algiers, despite some setbacks here and there, goes considerably up – many are beginning to assert now. And they have a point. Let’s wait and see.