Iran's aggressive stance ruffles feathers at OPEC
There are fears of an impending oil glut in the market. (Image credit: Shutterstock)
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WITH Iran taking an aggressive, rather bargaining, posture within the OPEC on crude output – in the wake of anticipated glut in the crude market – others had to follow suit. And this is exactly what other OPEC members did during the OAPEC ministerial in Doha last week according to an article in the Saudi Gazette.
It all began in Vienna, during the OPEC oil ministers’ meet early this month, where producers decided to roll over their current output. Yet, buoyed by an interim agreement on its nuclear program, Tehran hinted at raising its crude output quickly to 4 million bpd from the current 2.7 million bpd, indeed if and when it reaches a deal to roll back sanctions.
Speaking in Persian to Iranian journalists before the meeting, Bijan Zangeneh, Iran’s veteran oil minister, underlined Tehran would increase output even if crude prices tumbled: “Under any circumstances we will reach 4 million bpd even if the price of oil falls to $20 per barrel.” This was a clear challenge to fellow OPEC producers. And their response was very much on cards.
Indeed if, and this remains a big if on various counts, Iran raises output considerably, some adjustments are required to be made within OPEC. Otherwise, crude market prices will tumble, one could say with some degree of confidence.
New crude horizons are cropping up - all around. Already the United States’ average daily oil production is on track to surge by 1 million barrels per day this year, the biggest one-year jump in the nation’s history. The country has pumped an average of 7.5 million barrels of crude per day in 2013, up from 6.5 million barrels per day in 2012. That breaks last year’s record, when oil production jumped by 837,000 barrels per day between 2011 and 2012.
The US Energy Information Administration projects that oil production will jump by another 1 million barrels per day in 2014, largely buoyed by drilling activity in Texas’ Eagle Ford Shale and Permian Basin regions, as well as North Dakota’s Bakken Shale. The Gulf of Mexico also is seeing a boost, with oil production expected to grow to 1.4 million barrels per day in 2014, up by 100,000 barrels. By 2016, it is projected to touch all-time high, 9.6 million bpd.
And not only the US production is on up, output from Iraq and Libya is also in for considerable growth. And in the meantime, Gazprom is proudly claiming to be “the first company on Earth to pump oil from beneath icy Arctic waters,” as Russia’s first Arctic offshore field Prirazlomnoye, began production of oil.
And with the passage of constitutional amendments by its Congress last week, overturning the 1938 nationalization of its oil industry, Mexico has now opened its energy sector to outside investment. Despite enormous development in the deep water on the American side of the Gulf of Mexico, Mexico’s considerable potential in deep water has largely remained untapped, as Pemex, its national oil company simply did not have the technical capabilities or the funding to undertake the development, most agree.
The new law could bring substantial new resources to the world oil market, analysts are now underlining.
All this is going to impact OPEC. Commerzbank in a December 10 report said that OPEC would need to cut output, should Iranian and Libyan production return to the market. In order to prevent oil glut and keep prices stable above the $100 a barrel level, Saudi Arabia, Kuwait, Qatar, and UAE would have to reduce their production by 1million bpd, NCB monthly review on Saudi economic and financial developments said.
OPEC has not been oblivious to all this. With glut round the corner and adjustment in output seemingly required, OPEC is concerned – one cannot deny. It has put in place a committee to keep a tab on shale developments and its impact. Some OPEC officials have been publicly and privately jostling over whether the group should collectively cut back production in the event that global oil output rises significantly, threatening to weaken prices.
In its Monthly Oil Market Report, OPEC projected demand for its crude to contract by 0.31 million bpd to 29.6 million bpd in 2014 from estimated 29.9 million bpd in 2013.
Yet, the Iranian maneuvering for higher output is ruffling feathers within OPEC. Some are saying that on account of being the leading crude producer within OPEC, Saudi Arabia along with a few other Gulf producers, will have to bear the brunt so as to give room to any growth in output from Iran and others.
The battle for share within OPEC has thus begun!
Gulf Arab OPEC members, at least publicly, do not seem ready to cut output. Ministers from Saudi Arabia, Kuwait and Iraq are now insisting that irrespective of what is being said, all around, OPEC needn’t cut production next year to make room for additional supplies from Iran, Libya and US shale oil.
They appear firm on their viewpoint. Banking on market strength, they are of the opinion that markets would absorb the growing output, and they need not relinquish any room to the growing output from Iran, Iraq, Libya and others.
“Please don’t talk about cuts,” Minister Ali Naimi was categorical in Doha when asked if OPEC may consider a cut next year. “There are no cuts.” The minister added he was unconcerned about the potential market effect of a return of Iranian crude in the event sanctions are lifted after a possible deal with world powers over Tehran’s nuclear program. “God willing, there will not be any oversupply,” he told journalists.
Discarding the overproduction chorus, Minister Naimi even cast doubt on the possibility that a crude oil glut is imminent. “I’m telling you the market reflects fundamentals... this is the real situation. Why did oil prices rise by a few dollars recently? Today WTI is around $100 a barrel and before it was $94. Why has it changed? It has changed because people are expecting a shortage in supply, not oversupply,” he emphasized.
He also underlined his optimism that crude oil markets would remain stable next year, despite the group keeping its output ceiling unchanged. Iraqi Oil Minister Abdul Kareem Al-Luaibi too echoed the sentiments. “Supplies are in balance with demand so in reality there are no fears” of an impending glut in the market.
Heralding an era of adjustments and readjustments, energy diplomacy is taking over. OPEC energy diplomats at the negotiating table in Vienna have a real task in hand - a work in progress indeed.
Posturing is a part of it. In anticipation of the output growth, major stakeholders within the OPEC are beginning to take positions – preparing for the ultimate bargaining round – striving to extract the most in this phase of output rationalization. Minister Zangeneh fired the first shot, others are following in. He cannot and should not grumble now!