Syed Rashid Husain
WHEN Khalid Al-Falih landed in Vienna last week, all eyes were focused on him. With pundits proclaiming, once again the demise of OPEC, the energy world was eager to know, understand, and ascertain the views of the new czar of the Saudi oil.
And to have a feel of the pulse, Falih landed in Vienna a few days earlier than the meeting. In fact he was the first OPEC minister to be in Vienna for the ministerial. Apparently he wanted to not only acclimatize himself with the scenario, it also indicated that despite all the doomsday projections, Saudi Arabia took OPEC seriously. And before playing his cards, he wanted to understand the overall scenario. He made it a point to go the OPEC headquarters days before the ministerial and had meetings with Al-Bedri, apparently to understand the issues confronting the organization, and, in depth. And he made conscientious effort to stay off the radar too. Unlike Naimi, whose daily walks around Vienna’s Ringstrasse were always an opportunity for the energy world to get a glimpse of the Saudi thinking, Falih remained silent, bypassing hotel lobbies and taking back passages to avoid the press until the day of the reckoning. Before jumping on the main stage, he wanted to prepare and prepare well.
Falih was out there, representing a changed Riyadh. After weeks of deliberations in Riyadh and then a few days in Vienna, the evolving Saudi position appeared somewhat different. A breath of fresh air was definitely imminent. After months of aggressive posturing, Saudi Arabia promised not to flood the market with extra oil, suggesting a softening of stance. “We will be very gentle in our approach and make sure we don’t shock the market in any way,” Falih told reporters. “There is no reason to expect that Saudi Arabia is going to go on a flooding campaign,” he asserted when asked whether Saudi Arabia could add more barrels to the market.
Emphasizing the importance of OPEC to the energy world, Al-Falih reminded, it was time for the producers’ group to “steward the market” so as to help supply and demand back into balance. Some saw in it an indication of a shift in Riyadh’s approach after two years of letting markets determine the balance.
Speaking at the OPEC secretariat before the meeting, he said the group should “encourage the rebalancing to take place,” adding the kingdom wanted to avoid any oil shocks. “Whatever action we take will be taking into consideration that the market is doing quite well by itself, so we will be very gentle in our approach,” he emphasized.
Before the onset of the ministerial, he also told Argus Media: “There could be shorter-term situations in which, in our view, OPEC might intervene and yet other situations - such as long-term growth of marginal barrels - in which case it should not.”
Falih appeared optimistic too. Talking to CNBC, he said "the market is balancing. Trends are all good in terms of supply and demand. Prices have recovered somewhat and I believe they will continue to recover," he said.
Markets were quick to note the subtle change in Saudi position. “What is also important is that (the) Saudis are not planning to flood the market and want higher prices,” Gary Ross, founder of US-based PIRA consultancy underlined in comments to the press.
Even the Iranian position appeared milder. Oil Minister Bijan Zanganeh, who came to Vienna vowing not to concede any export curbs, until its crude shipments reached pre-sanction levels, said he was generally happy with the outcome of the meeting. He also said he saw no signs that other member countries wanted to boost output steeply. This was in contrast to some earlier statements from Tehran. Some hints of cohesion were finally there to be seen.
And in a fair indicator of the changing mood, several OPEC sources reportedly said that Saudi Arabia and its Gulf allies had tried to propose the ministers a new collective ceiling in an attempt to repair OPEC’s waning importance and end a market-share battle that has sapped prices and cut investment.
While some such as Kuwait and Qatar appeared to lean toward the Saudi proposal - agreeing on the need for an output ceiling - Iran apparently was not convinced, underlining that an output ceiling must be accompanied by a country-specific quota system. “I don’t agree with an overall output ceiling for OPEC,” Iranian Oil Minister Bijan Namdar Zanganeh said. Others such as Venezuela and Algeria too seemed to agree with Iran.
Markets were taking note of the changing tone and tenor - within the OPEC. “Contrary to market speculation, Saudi Arabia is open to cooperation,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd said in a report quoted by Bloomberg. Options under discussion included a new ceiling of 32 million barrels a day, he added. That’s close to the 32.4 million barrels a day the group estimated it produced in April.
Optimism within OPEC ranks in Vienna was also palpable. This was in sharp contrast to recent past. And there were reasons for this. Oil prices have gone up by almost 100 percent since the lows registered in January this year. The pressure on OPEC to ‘do something’ has receded. Despite rising output by some OPEC members, the group's overall production has remained largely flat this year, standing at around 32.5 bpd, capped by disruptions especially in Nigeria, Libya and Venezuela.
“The worst is over for oil,” insisted Mohammed Al-Sada, the Qatari energy minister. “There was a consensus that market fundamentals are working and there wasn’t pressure on OPEC to think about influencing supply and demand.”
UAE Oil Minister Suhail Al Mazrouei also expressed almost the same, pointing out: “From the beginning of the year until now, the market has been correcting itself upward,” and he hopefully added, “the market will fix itself to a price that is fair to the consumers and to the producers.”
In view of the changed scenario, Citi said it expected oil prices to rise above $50 per barrel "in the near future" as attacks on oil infrastructure in Nigeria, power outages, and payment issues in Venezuela and chaos in Libya have reined in total OPEC production even as Iran has ramped up harder and faster than expected.
Al-Falih’s charm offensive has worked. “Despite the lack of cooperation between member countries and the free-for-all output policy, Khalid Al-Falih did his best to calm nerves,” Tamas Varga of London-based broker PVM told FT.
Consequently, OPEC is out of the deathbed - at least for now.
