Iran’s Oil Diplomacy

 

The Organization of the Petroleum Exporting Countries (OPEC) held its 166th ministerial meeting at a time when crude oil prices have fallen by more than 30 percent since June to around $80, the four-year lows.

The sharp oil price decline had added to the urgency of such a meeting. Oil market analysts described it as one of the most important ministerial meetings of OPEC in the past 15 years.

Ahead of the meeting, prediction was rife about how OPEC would deal with the price falls, but OPEC oil ministers had already fine-tuned their calls about oil production.

Iran’s Petroleum Minister Bijan Namdar Zangeneh exchanged views with his Qatari, Kuwaiti and Emirati counterparts, as well as Iraqi and Venezuelan officials about oil. Iran’s minister had said that Tehran supports a cut in the OPEC production ceiling in order to prevent further price falls and safeguard the interests of MCs.

Zangeneh had said that he was seriously following up on the issue of oil in order to persuade OPEC members to close ranks.

“Although Persian Gulf littoral states are willing to preserve their market share, they are unwilling to cut production, all member states should express themselves because even the opposition of a single member state will be effective,” the minister said.

Zangeneh also travelled to non-OPEC Azerbaijan Republic to discuss its cooperation with OPEC for bringing back stability to the oil market.

Venezuelan Foreign Minister Rafael Ramirez also embarked on an oil tour to solicit oil producers over production cut. He travelled to Saudi Arabia and Russia and he also visited Tehran. Venezuela’s economy is heavily dependent on oil revenues and oil price decline seriously harms its economy.

In his meetings, Zangeneh did not rule out the possibility of impact of political issues like the US’s intention to lower the oil prices in order to ramp up pressure on oil-rich Russia.

“Given the dominant share of revenues from oil and gas exports in Russia’s exports revenues, this country is losing 25 to 30 percent of its exports income due to oil price fall. Even before any sanctions are enforced, the revenue of this country is falling by around one-fourth,” Zangeneh said. “Although oil price decline is not a good event but Iran would not be harmed like Russia by falling prices because Iran’s oil production has declined in recent years and we have managed to run the country with this [low] level of production.”

Analysts say Saudi Arabia’s behavior in the market is a political game for lowering prices. In their view, Saudi Arabia is increasing its oil supply on the market and cutting prices in order to make shale oil production in the US uneconomical so that this [shale] oil would be driven out of market. To that effect, Saudi Arabia even moved to cut the price of oil supplies to its Asian buyers.

The US has cut its oil imports from OPEC countries and Saudi Arabia is making stronger efforts to sell its oil in Asia and it is facing such rivals as Nigeria. A main reason for Saudi Arabia’s decision to cut its oil prices in recent weeks was to be able to sell more on this competitive market. Some analysts say Saudi Arabia, whose political influence in regional developments has been weakened, is trying to flex muscles and prove to the Middle East and the world that it has the final say on oil prices.

Saudi Oil Minister Ali al-Naimi recently visited Mexico where he agreed with Mexican Energy Minister Pedro Joaquin Coldwell to make efforts for stabilizing oil prices.

The Saudi minister broke his months-long silence by dismissing any intention of price war. He said that Saudi Arabia is trying to help stabilize oil markets, but stopped short of expressing himself about falling prices.

The oil price fall is not as worrying for everyone. It augurs well for Europe’s economy which is likely to plunge into a third cycle of recession. Economists say 10-percent decline in the oil prices means 0.1% increase in the Europe’s production. In Asia, China is benefiting from oil price falls while Japan’s economy is getting a boost. Japan imports half of its oil consumption. High energy prices stoke up inflation in Japan. India relies on imports for 75% of its oil needs and lower oil prices are in favor of India’s budget deficit.

 

OPEC Consensus

 

The Iranian petroleum minister believes that striking balance into an unstable oil market is difficult; however, he underscores unity among OPEC member states.

“OPEC member states should refrain from taking any position which would question the unity of this organization because any decision in OPEC needs consensus,” he said in a televised interview.

Zangeneh said OPEC member states should not accuse each other of wrongdoing.

The minister believes that when the prices are above $100, OPEC has no role to play, noting that OPEC’s role is pushed to bold relief when oil prices fall.

Zangeneh said five decades of experience show that OPEC member states have always reached unanimity under tough conditions.

 

Oil Price Test

 

It is not the first time in history that OPEC member states have to deal with falling oil prices. OPEC member states once experienced price fall to below $10 a barrel in 1998. The reason was that OPEC had raised its output despite falling demand amid economic crisis in Southeast Asia. It took OPEC three years to bring balance back to the market.

In 2008, when the world plunged into economic turmoil, oil price sharply fell from $147 to $47. OPEC ministers met in September that year, and cut the group’s production ceiling by 1.5 mb/d that proved to be insufficient. In December the same year, OPEC held an emergency meeting in Algeria. Oil market was facing a growing glut and OPEC agreed to slash production by 2.2 mb/d more as of January 2009. That was the biggest production cut in OPEC history. The body had already cut production by 1.7 mb/d in 1999.

Throughout these two crises, OPEC member states exercised unity and solidarity and they managed to stabilize the market and prices.

Non-OPEC oil producers often agree with production cut only in words. However, they were very cooperative with OPEC in 2008 when Russia cut 100,000 b/d from its oil production and Azerbaijan 300,000 b/d.

Over the past five years, oil market has been relatively calm and stable and oil prices have been fluctuating between $100 and $120.

Major crude oil consumers had accepted these prices despite economic problems and the prices sounded logical for all producers.

A new round of oil price fall started in June 2014 and has fallen by 24% to $75-$80. OPEC producers are once again worried that the falling trend would continue.

 

Supply Overtakes Demand

 

Oil market analysts see numerous factors affecting oil prices, but they mainly believe that the main reason is that the market is over supplied and ample supply is overtaking the sluggish demand.

“Market estimates show that the world is facing excess in supply in 2014 and it results from overproduction by some OPEC members, shale oil and oil production by minor producers,” Zangeneh said recently.

The Iranian minister predicted that the world would see 1.8 mb in excess glut in 2015, noting that the future market is behind the current price falls.

Zangeneh said surplus oil production is stored and that the volume of storage is very important for the market. “Oil speculators are regularly monitoring the volume of oil storage and they set the price based on that volume.”

He said the oil market is affected both physically and psychologically, adding: “I also experienced $7 oil and I know how difficult it would be to stabilize an unbalanced market.”

Zangeneh also said that Iran’s oil exports have fallen from 2.5 mb/d to around 1 mb/d. “And if the market obliges us to move in a direction to be forced to cut 150,000 to 200,000 barrels, it would not change our position and it would not worry us.”

At present, the oil market has between 1.5 and 2mb in excess supply, mainly produced by non-OPEC and shale oil producers. If non-OPEC oil producers do not help OPEC get out of the present circumstances, OPEC member states may not be able to do their job and may be unwilling to reduce production despite pressures piled up on their national budgets due to falling prices.

This time, the conditions are quite different because even non-OPEC oil producers are feeling the pinch from oil price slump.

Russia has been slapped sanctions by the US and the West due to the crisis in Ukraine. It is deeply worried over the oil price fall. Norway is complaining that investment in its oil sector is diminishing. Mexico also showed signs of anxiety and it had to consult with OPEC’s kingpin.

The current price slump will definitely harm the countries operating in recovery from deepwater hydrocarbon reservoirs, shale oil and tar sand.

If the price slide continues, many development projects would be put on hold and some companies may go bankrupt.