The difficult path towards agreement on the output cut

The difficult path towards agreement on the output cut

Emilio Fabio Torsello
Saudi Arabia and Russia have deserted the meeting of non-organization producer countries. The agreement on limiting output should be reached on 30 November, but things seem evermore in the balance

Looking back, the way to rebalancing supply and demand in the oil market is littered with obstacles, difficulties and dead-ends. Indeed, ever since oil prices started to drop - a decline that began more than a year ago due to supply outstripping demand - several attempts have been made to bring the market back to normal levels, with affordable prices in line with global energy company and State budgets.

Saudi Arabia pulls out

The latest updates tell of further rifts. A few hours from the OPEC meeting in Vienna, Saudi Arabia has in fact stated that it does not wish to attend the encounter with the non-OPEC countries. A decision that subsequently prompted Russia to make exactly the same announcement, in response to Riyadh's stance. And the motivation of the Saudi Royal family is clear: The Producer Country Organization has to first "solve its problems as OPEC – given that we have not yet reached an agreement within the Petroleum Exporting Country organisation. Before meeting the non-OPEC countries and asking them to participate in any action, we need to have a credible agreement with clear figures and a system that the market can believe in." A move that sends a clear signal: the pricing policy should be first and foremost decided by OPEC. At risk appear not only the market and oil prices per barrel but also the very steadfastness of OPEC itself, for many years now perceived as an organization in which each country brings its own needs to the negotiating table, though with little or no possibility of compromise.

Budgets and oil companies at risk

This stalemate is in turn having repercussions on those countries that count on oil revenues to ensure the proper functioning of their state machine: from Saudi Arabia to Russia, going by way of Iraq, Iran, Nigeria and Libya. Riyadh, for example, has had to cut the salaries and bonuses of public servants in response to lost revenues. And in recent weeks the Saudi Royal family has also decided to sack the country's Finance Minister, who, it is said, was unable to foresee and to effectively forestall the impact of the drop in oil prices. Riyadh has also decided to take action on energy production by opening to Renewables, fielding technologies and investments that support the country at a time of economic crisis, while at the same time also ramping up its petrochemical industry. Russia itself is going through a period of significant stagnation due to the low oil prices. For 2017, in particular, the Russian Ministry of Economy does not expect a particularly sizeable revenue from oil.
Yet, despite this crisis that is also jeopardizing the sustainability of important companies structured on a global level, as well as their ability to seek out new sites and potentially productive basins - Norway, for example, has limited these activities a great deal - to date OPEC and non-OPEC countries have not yet managed to reach an agreement to limit production, in order to allow demand to increase over supply.
The situation is worsened by the so-called outsiders: those countries that were once major players on the oil market and that are now experiencing economic and social crises that leave them unable and/or unwilling to cut or limit the only source of guaranteed State income. In Libya, for example, the country’s economic situation prevents it from taking part in any would-be agreement decided by OPEC "at least for the near future". This was declared, as reported by Bloomberg, by the President of the Libyan National Oil Company, Mustafa Sanalla. Libya in recent weeks has more than doubled its production of crude oil to about 600 thousand barrels per day, ever since different ports for the shipping of oil were freed last September. But the country’s output still remains well below the 1.6 million barrels per day that Libya produced prior to the uprisings in 2011.

The spectre of $25 a barrel

Any failure to agree – engendered by the unsuccessful outcome at Doha and partially that of Algiers - is likely now to have extremely negative effects on the market: Oil prices  could reach 40 dollars a barrel over the next three years, as the governess of the Russian Central Bank, Elvira Nabiullina, has not been alone in predicting. But the situation may also be much more dramatic. In the economic scenarios that Moscow is studying to prevent any potential economic crises and support the GDP, Nabiullina in fact also indicates the possibility that crude oil prices could plummet "to 25 dollars", with a market that in 2017 the EIA fears could be inundated and put out of control by petroleum products. A prospect that would seriously endanger the steadfastness of both companies and Countries.