Here we briefly review how Iran’s representatives to OPEC
managed to make developments play in Iran’s favor.
The Declaration of Cooperation, signed by OPEC and non-OPEC
allies, took effect in January 2017. It achieved its objectives in March and
April the following year. The excess oil stocks, besides the five-year average,
in the Organization for Economic Cooperation and Development (OECD) – an
indicator of oil market imbalance – dropped to zero (down 326 million barrels),
OPEC basket oil price rallied from $52.5 a barrel in January 2017 to $63.17 a
barrel in April 2018 and call on OPEC crude oil increased on par with growing
global oil demand. The monthly oil market review by the International Energy
Agency (IEA) in April 2018 proved the accuracy of all such developments. All
these positive developments were outcome of OPEC and non-OPEC oil producers'
commitments in the Declaration of Cooperation signed in December 2016 for
cutting their output 1.8 mb/d to shore up oil prices. The agreement came into
effect in January 2017, restoring stability to the market. Nonetheless, this
successful trend and acquisition of maximum interests by OPEC and volunteer
non-OPEC producers was disrupted by President Trump’s meddlesome tweets which
were endorsed by some OPEC member states.
It was May 8, 2018 when President Trump pulled the US out of
the Joint Comprehensive Plan of Action (JCPOA), as is formally known Iran’s
historic nuclear deal with six world powers. Consequently, he began re-imposing
sanctions lifted earlier under the deal. Trump had said he planned to impose
the toughest ever economic sanctions on Iran. Trump’s anti-Iran stance and
policy drew condemnations worldwide; however, some OPEC producers, showing
support for the US decision and hoping to drive Iran out of the market,
supplied extra barrels of oil on the market, which had earlier been removed and
had brought stability to the market under OPEC-non-OPEC agreement. The extra
barrels of oil undid all achievements of the 2016 agreement. In the run-up to
such events, Iran had notified OPEC Secretariat in advance in words and in
deeds. Iran’s Minister of Petroleum Bijan Zangeneh wrote six key letters to the
OPEC Secretary General Mohammad Sanusi Barkindo and OPEC rotating President
Suhail al-Mazrouei, indicating Iran’s oil market forecasts.
Forty-four days after the US pulled out of the JCPOA, the
174th OPEC Conference was held (June 22, 2018) at a time Trump called in his
tweets for OPEC oil production hike, while the oil market had reached stability
in supply and demand. Trump formulated his demand in the hope of finding
replacement to Iran’s oil which he expected to be eliminated due to the oil
sanctions he would place back on Iran in August. As President Trump called for
OPEC output hike, OPEC Secretariat’s estimates of oil supply and demand
changed, contrary to other reliable sources like IEA. OPEC Secretariat
presented a strange image of oil supply shortage and growing demand for OPEC
crude oil for the third and fourth quarters of the year. The Iranian delegation
dismissed the estimates on the ground that the oil market was not
undersupplied. Iranian delegates had expressed their opposition during the
Economic Commission Board (ECB) meeting in June and in the Joint Technical
Meetings (JTC) held earlier. OPEC, later on when oil prices had dropped by $20
a barrel acknowledged that Iran was right in its estimates of oil market
stability.
One day before OPEC 174th ministerial meeting in Vienna,
Minister Zangeneh asked: “Please someone explain me why we should raise
production in a balanced market?” The Iranian minister knew quite well that
there was no shortage in the oil market and that OPEC Secretariat had presented
an unreal image of oil shortage in the market due to increased production by
Saudi Arabia, the United Arab Emirates (UAE), Iraq and Kuwait. Zangeneh said
firmly that Iran would veto any decision by OPEC member states to raise output
by 1 mb/d. Saudi Arabia, UAE and non-OPEC Russia favored oil output hike, but
the final outcome was exactly opposite. The OPEC 174th ministerial meeting
called on the member states to make their best for full compliance with the
production ceiling set earlier.
Saudi Arabia and its OPEC allies had started increasing
production since June. They had also taken advantage of the OPEC/non-OPEC Joint
Ministerial Monitoring Committee (JMMC) to attach legitimacy to their illegal
output hike under the pretext of executing OPEC decisions. That is why Iran’s
Zangeneh addressed a letter to the OPEC rotating president in August, warning
that the JMMC was not authorized to and should not readjust any extra
production between OPEC and non-OPEC producers. “OPEC’s attempts to preserve
the market stability and realize objectives… are very significant. All OPEC
member states are required to follow up on and implement these decisions,”
wrote Zangeneh in his letter. The letters addressed to OPEC Secretariat by
Iran’s minister showed Tehran’s firmness in preserving its interests by any
means at its disposal.
Several days prior to the JMMC meeting on September 23,
pro-Saudi media started spreading rumors about alleged plans for a 1 mb/d
output hike by OPEC and non-OPEC partners. However, the Iranian delegation to
OPEC did not stand idle and it expressed Tehran’s position in clear terms. It
was noted that the oil market did not face any supply shortages and that the
market was even oversupplied. Iran strongly opposed attempts by some OPEC
member states to leave the organization’s share to non-OPEC oil producers.
Hossein Kazempour Ardebili Iran’s governor for OPEC said OPEC’s share should
not be given to non-OPEC countries. Thanks to the Iranian delegates’ legal
interpretation of the decisions made by the OPEC 174th ministerial meeting,
which was then endorsed by OPEC Secretariat, it was proven that the JMMC was
not competent to readjust the excess production. Following this development,
the issue of readjustment of excess production by OPEC and non-OPEC was put off
to the December meeting.
Increased production by some OPEC member states and Russia
at a time the oil market was oversupplied significantly affected the prices.
From May to October, OPEC and non-OPEC producers had increased their output by
768,000 b/d and 275,000 b/d, respectively. Saudi Arabia, UAE, Iraq and Russia
had respectively lifted their output by 644,000 b/d, 384,000 b/d, 190,000 b/d
and 458,000 b/d over the same period. Totally, during months following June,
Saudi Arabia, UAE, Iraq and Russia had violated their quota obligations. For
instance, in October OPEC plus Russia produced 1.8 mb/d of oil above their
quota, 1.4 mb/d of which came from the six JMMC members (Saudi Arabia, UAE,
Algeria, Kuwait, Russia and Oman). The JMMC members were supposed to monitor
the proper implementation of the Declaration of Cooperation, but they
themselves had violated the terms of the agreement!
The increased oil production was not limited to Saudi
Arabia, UAE, Iraq and Russia. From May to October, US crude oil production
increased 1 mb/d as global prices grew. The increased oil output along with
lower demand for oil due to the US-China trade war and the dollar appreciation
caused OECD stocks to increase about 56 mb/d, well beyond its five-year average
levels. That was a sign of new disturbance in the oil market. It would be
important to keep in mind that illegal production by JMMC states was a factor
impacting the oil market balance. That is while during the 175th ministerial
meeting, the same nations were making every effort to engage all signatories to
the Declaration of Cooperation in oil production decline. That is why Kazempour
Ardebili Iran’s governor for OPEC said the nations that destabilized the market
had to restore stability to it.
Due to the new conditions and inaccurate estimates by OPEC
Secretariat of oil supply and demand for the third and the fourth quarters of
2018, as well as increased oil supply by OPEC and Russia from May, the oil
price slumped. It is noteworthy that ever since the implementation of
OPEC-non-OPEC agreement in January 2017 up to the end of September 2018, the
average price of OPEC Reference Basket (ORB) increased about $25 per barrel to
reach $77. That was while from the first week of October until the closing week
of November 2018, the ORB price reached $65, down $18 a barrel. That means
about 72% of the price growth caused by the OPEC-non-OPEC agreement over 21
months was lost in less than two months. Of course, one should keep in mind
that the US increased oil production over that period due to higher oil prices
reduced call on OPEC, thereby reducing the OPEC market share. Even worse was
that OECD five-year stocks exceeded the five-year average. Should OPEC continue
with its current policy, OECD oil stocks would have increased about 400 million
barrels by the end of 2019. Furthermore, oil prices will keep falling and
OPECmarket share will drop by 900,000 b/d to reach 31.3 mb/d.
The oil market was
destabilized one month before the OPEC 175th ministerial meeting due to JMMC’s
lack of prudence. Such conditions prompted Minister Zangeneh to write a
strongly worded letter to OPEC President al-Mazrouei, demanding that the JMMC
activities be stopped. Analysts say Zangeneh’s letter firmly called into
question the very foundations of this committee. In his letter, Zangeneh said:
"To our dismay we witnessed that some members attempted to redistribute
over-conformity in production adjustment level among themselves, and made
attempts to hand over OPEC countries' over-conformity to non-OPEC countries. I
ran participated at the 18th JTC without any voting right, and [witnessed] that
some members attempted to redistribute over-conformity in production adjustment
level among themselves, and made
attempts to hand over OPEC countries' over-conformity to non-OPEC countries.
This very procedure is totally in contradiction with the monitoring task of
both JMMC and JTC, and indicates misinterpretation by the JMMC over its
mandate, as well as disregarding the decision of the 174th Meeting of the OPEC
Conference. Given the performance of the JMMC and JTC over recent months, we
have regrettably noticed that these two committees have deviated from their
initial objectives for which they were established, and some OPEC members of
these two committees have clearly taken side with the US in imposing its
unilateral and unlawful sanctions against Islamic Republic of Iran, and are
turning these two committees into political tools in support of the US policies
against Islamic Republic of Iran.” Amid such conditions, OPEC and non-OPEC
partners returned to the negotiating table.
The 15 OPEC member states stepped into the 175th ministerial
meeting against the backdrop of a $30 fall in oil prices over three months.
However, Iran’s position was crystal clear from the very beginning: “As long as
Iran is under sanctions it will not join any agreement”. Iran had regularly
favored OPEC production cut, but it refused to cut its own output during the
November meeting. However, many sought to engage Iran in this agreement. For
instance, it was suggested that the reference for Iran’s oil production cut,
unlike fellow OPEC states, not be October 2018 and the April-May average be set
as the basis. Or it was suggested that the basis for Iran’s oil production
decline be set the maximum output after the OPEC-non-OPEC Declaration of
Cooperation. Iran was even asked to symbolically join the production cut
agreement. In a bid ratchet up pressure on Iran, it was said that since Iran
and Russia were equally facing sanctions Russia would not join an agreement
from which Iran would be exempted. Russia’s Minister of Energy Alexander Novak
was totally unaware of such pressure and he declined to confirm such news after
his meeting with Zangeneh ended inconclusively. The definite outcome was
deadlock.
The tactic chosen by Saudi Arabia and UAE for engaging Iran
in a production cut agreement did not come to fruition on the first day of OPEC
meeting which was extended into a second day. The ECB had suggested that OPEC
cut its output by either 1.3 mb/d or 2.1 mb/d. In the end, OPEC and non-OPEC
participating countries in the DoC agreed on 1.2 mb/d cut. OPEC had to account
for 800,000 b/d while Iran, Venezuela and Libya were granted exemption. That
constituted a big victory for Iran. Iran’s exemption from production cut meant
maintaining its December 2016 production ceiling (3.797 mb/d) and not losing
its oil market share.
OPEC’s tough year in 2018 ended with some OPEC states
violating the decisions of the Organization and their alignment with the US to
harm fellow members. Two OPEC members teamed up with US to strike a heavy blow
at minor producers and inflicted heavy financial harms on them. Under such
tough conditions, Iran kept its flag flying high and the Iranian delegation
struggled for maximum benefits for the country, while it managed to keep OPEC,
comprising Third World nations, afloat. What conditions Iran would have had the
country not opposed the 1mb/d output cut suggested at OPEC in June?
Undoubtedly, Iran is facing many buts and ifs in the current year. Extension of
US sanctions waivers to the traditional buyers of Iran’s crude oil is one of
those challenges. However, Iran is expected to go through a new critical period
as it did during the second half of last year. The year 2019 started with OPEC
basket price at about $52 a barrel.
Courtesy of Iran Petroleum
By Roya Khaleq
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