As uncertainty rules, the only certainty is that OPEC's upcoming meeting will be a game changer

Published October 26th, 2014 - 01:57 GMT
With markets faltering, most Gulf Arab crude producers today however, can bank upon the cushion of significant reserves
With markets faltering, most Gulf Arab crude producers today however, can bank upon the cushion of significant reserves

Uncertainty is ruling. Crude markets are in for a battering. The wheel has taken a full circle. Market prices have fallen by 25 percent since June. The classical, cyclical, trough has arrived - yet at a wrong time - as always. It has come while most producers are faced with growing public expenditure. The call on petrodollars in energy-rich countries is on the rise, as public spending has skyrocketed throughout the region. With spring in air, the impact on the expenditure pattern of the Gulf OPEC producers is no different - to say the least. The additional, still growing expenses, needs to be accounted for, somehow.

With markets faltering, most Gulf Arab crude producers today however, can bank upon the cushion of significant reserves. The budget breakeven levels of most Gulf Arab crude producers appear manageable too - at this point in time.

But not all the producers are in the same league. In case of a bottoming market, Russia, Iran and Venezuela are faced with strong headwinds - threatening the very growth, stability and sustainability of their economies. The dwindling fortunes may have strategic consequences too - altering and impacting - the long term geopolitical ambitions of their respective governments.

While a lot has been said and reported globally on the Russian quagmire and its consequences, the situation of Iran is significantly interesting. It has many facets. Already faced with western sanctions, it presents a peculiar scenario. Designed to curb its purported nuclear program, sanctions have made Iran especially vulnerable to the falling crude fortunes.

Tehran desperately needs revenue from oil sales. The country has already lost about half of its oil revenues since 2011. Sanctions involving tough restrictions on financial transactions related to Iranian oil exports have had a significant impact on Tehran’s oil output too. By some estimates, crude exports have fallen by one million barrels per day. As a result, Iran’s income from oil exports has reportedly fallen from $118 billion in 2011-2012 to $56 billion in 2013-2014. Falling prices are a double whammy to Tehran. To cover its budgeted expenditure, the Islamic Republic needs an oil price of at least $140 per barrel. The prices currently are hovering around $85. The gap is significant and is widening!

And while lower oil prices have definitely impacted the overall economy in Tehran, it also has limited Iran’s flexibility in negotiations over its nuclear program. Sanctions are choking crude exports, the nation’s main source of income. Iran is negotiating with the US and five other world powers over an agreement that would lift the curbs. The countries have set a November 24 deadline for an accord, three days before OPEC meets next. Time is getting crucial.

The less cash flows from oil business, easing of sanctions becomes the more important to Tehran, analysts strongly feel. Diminishing returns on oil sales could push Tehran to strike a deal with West, many in Washington argue today. “Iran is constrained by sanctions,” Mehdi Varzi, a former Iranian diplomat and director of Varzi Energy Ltd., an energy-consulting company, was quoted as saying by media.

The situation is already dire. Oil exports from Iran fell to the lowest level on record in August, Joint Organizations Data Initiative (JODI) confirmed. As sanctions drove oil output to the lowest since 1990 and deterred foreign investment, Iran’s $400 billion economy has shrunk by more than 7 percent over the past two years, the International Monetary Fund reported.

Iran’s dependence on oil revenue is putting the Islamic Republic’s economy at the mercy of major powers, Supreme Iranian leader Ayatollah Ali Khamenei conceded last week. “Running our country on oil revenue leaves Iran’s economy at the mercy of major policymakers in the world,” Khamenei underlined, referring to the sharp drop in oil prices.

“They (the West) have forced our oil production from 4 million bpd to 1 million bpd, and this recent fall of oil prices is their latest gimmick,” government spokesman Mohammad Baqer Nobakht was quoted as saying by the semi-official Mehr News.

“We should not pin our hopes on high oil prices, but seek to compensate for falling revenues with bigger volumes of exports,” Abbas Ali Noura, an ex-parliamentarian, was quoted as saying by Qods Online. But how is that possible, with sanctions on, is though difficult to gauge.

In view of the emerging scenario, President Hassan Rouhani’s administration appears scrambling for alternative sources of income to meet revenue forecasts. Last week, the president asked the oil minister Bijan Zangeneh to come up with “more effective use of diplomacy” to stop a further slide in crude prices.

Iran, OPEC’s second-largest producer, is normally among the first OPEC members stressing on cutting supply to support prices, analysts say. But in a change of tack, Iran is now saying that it could live with lower oil prices and that there was no need for an emergency OPEC meeting to discuss and stop the slide in prices. ‘Tehran isn’t concerned about the latest decrease,’ Roknoddin Javadi, deputy oil minister and managing director of the National Iranian Oil Co., told the Mehr agency on October 14. “They may have made the calculation that if a nuclear deal can be struck, they will be permitted to increase their exports, so why talk about an OPEC cut right now?” underlines Mehdi Varzi.

But in medium term, Tehran definitely wants producers to rein in output. Iran’s Oil Ministry warned earlier the month that oil prices will slump further if OPEC repeats its mistakes of the 1990s and fails to cut production fast enough to cope with the glut of crude flooding the international market.

“In 1998, the inadequate response by OPEC sent oil prices to as low as $6 to $8 per barrel,” Mehran Amirmoeini, a top energy adviser, was quoted as saying by the official Iranian Oil Ministry news service. Iran cannot afford that - this time round.

The next OPEC meeting in Vienna on November 27 will be crucial in many ways. Eyes are focused on it. The ministerial would determine the direction of the oil markets in the near to mid-term. Fireworks are already in air. The upcoming moot in Vienna is anticipated to be one of the most heated ones in recent times, analysts strongly feel. Flaring up of temperatures inside the meeting room in Vienna on the fateful day could not be ruled out. Much is at stake. 

 

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