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 Yet, rather than closing ranks, OPEC is finding that an intensifying
battle for market share, worsened by deep regional differences
between Saudi Arabia and Iran, is driving it further apart.
Halfway through last Friday's six-hour meeting, an unexpected
dispute erupted over the defining feature of the cartel. In a move
sources say was masterminded by Saudi Arabia, ministers finally
agreed for the first time in decades to drop any reference to the
13-member group's output ceiling.
The pivot, which surprised not only markets but also some OPEC
officials, appeared to be a direct response to Saudi Arabia's
arch-rival Iran, which has made clear it intends to make a rapid
return to global oil markets next year as nuclear-related sanctions
are lifted.
With Tehran looking to pump as much as 1 million barrels per day
(bpd) more crude into a market already saturated with excess supply,
an increase of about 1 percent in world supply, maintaining or
legitimizing any pretence of OPEC limits - no matter how notional -
was not an option for Riyadh.
"The ceiling issue was very controversial and they could not decide
on it," said an OPEC source briefed on the discussion inside the
room. "Nobody was happy."
Earlier, another source said there was a "huge disagreement among
members, even bigger now, as oversupply is no longer mainly coming
from Gulf delegates, but from Iran."
In the near-term, the outcome of Friday's meeting probably makes
little difference in global markets. Ever since last year, most
members have been pumping flat-out to defend their market from
fast-growing upstart rivals like U.S. shale drillers.
And anyway the group's 30 million bpd ceiling has largely been
symbolic and, in practical terms, ignored.
Yet abandoning the pretence of production restraint threatens to
intensify price wars between OPEC members, leaving them even less
likely to agree on any market measures down the road, analysts said,
and piling more pressure on prices.
In a note following the meeting, Goldman Sachs said it saw a rising
probability that the markets may need to adjust through "operational
stress" when the world runs out of storage capacity, reiterating its
"lower for even longer" thesis.
OPEC'S PURPOSE
Since OPEC, which produces a third of global oil, was set up 55
years ago, the purpose of its existence was to set production
targets to try to influence global prices.
It has weathered internal strife and conflict before, including wars
between its own members -- Iran and Iraq in the 1980s, and Iraq's
invasion of Kuwait in the 1990s.
But the present Sunni-Shia conflicts setting Saudi Arabia and Iran
at each other's throats, particularly in Syria and Yemen, make the
relationship between the two OPEC powers even more fraught.
"The fact that Iranian-backed Houthi militants are squaring off
against Saudi-led troops in Yemen is not helpful, as increased
Iranian oil revenues are likely to find their way to Iranian
military interests in Yemen, Iraq and Syria," said Aberdeen Asset
Management's investment strategist Robert Minter.
Hence OPEC is setting up for a showdown at the corral, he added, as
Iran wants its pre-sanction market share back, and the Gulf states
are not inclined to cede volume when they are already feeling the
budgetary pain of reduced prices.
CONFUSION EMERGES
Unlike OPEC's previous meeting six months ago, when oil prices
showed signs of stabilizing near a tolerable $65 a barrel, last
week's meeting was bound to be more tense as an unexpectedly deep
and prolonged slump has sapped their economies.
All the same, on Friday morning, most delegates and experts
anticipated a relatively straightforward meeting that would bless
the free-market policy and rubber-stamp a production ceiling. The
only likely change, so it seemed, might be raising the figure to
31.5 million bpd to reflect current output rates, rather than the
long-exceeded 30 million bpd last reset four years ago.
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After all, despite the price pain, there were signs that the
dramatic strategy masterminded a year ago by Saudi oil minister Ali
al-Naimi was working, albeit more slowly than hoped. Booming U.S.
oil production has shifted into reverse, while the world's demand
for oil has revved into a higher gear.
The first sign of confusion emerged more than 3 hours into the
meeting as ministers broke for lunch.
Word leaked that the group had indeed agreed to raise its ceiling to
31.5 million bpd - but it was unclear whether the figure included
Indonesia, which was rejoining the group after a hiatus, leaving a
0.9 million bpd margin of error.
Although the ceiling increase would have no material effect on
actual production, the news sent oil prices tumbling by as much as
$1 a barrel, pushing U.S. crude back below $40 a barrel, a response
that was unlikely to have heartened ministers.
ABOUT FACE
At this point many expected the meeting to adjourn quickly, as it
had six months earlier. Instead, behind closed doors, officials
continued to talk. More than 2 hours passed before stoney-faced
ministers emerged, many heading quickly, and without comment, to the
airport.
What fully transpired during that afternoon remains unclear. But
several OPEC sources said ultimately a decision was reached that
having no ceiling at all would be less negative for oil prices than
having a higher ceiling.
There appears to have been little if any debate about Iran's
production, although it has been clear for months that it will
likely be the biggest challenge they face in 2016.
"We spent two minutes on that issue. You can't stop a sovereign
country from coming back to the market. So, debating it is
irrelevant," said Nigerian oil minister Emmanuel Ibe Kachikwu. "As a
matter of fact, our position is that Iran would displace somebody
who is not an OPEC member."
"From Saudi prospective, they have no allies. So staying the course
makes sense for the Saudis," said veteran OPEC watcher Gary Ross,
founder of Pira Energy thinktank.
Ministers later sought to play down any conflict. Most said they saw
no problem in having no targets for a few months and agree new ones
when Iran returns to the market, hoping by then for a deeper decline
in U.S. oil production.
Some said they spent far more time discussing the succession of
Secretary General Abdullah al-Badri, whose term is expiring.
One thing is clear though - Friday's decision will in no way help
persuade non-OPEC rivals to curtail their output.
"I find it very strange when proposals are being made to cut output
when OPEC itself is increasing production," the head of the Kremlin
oil major Rosneft Igor Sechin told Reuters last week ahead of the
OPEC meeting.
(Writing by Dmitry Zhdannikov; editing by Jonathan Leff, Richard
Mably and Richard Balmforth)
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