Based on estimates, OPEC output now stands at 34 million barrels per day. The rationing plan to cut the surplus output targeted in the past two months is the topic of discussion by OPEC officials on bilateral and multilateral basis. Presumably, no definite result has yet been gained out of the talks. Outcome of the conference—as is revealed from its topic- is expected to affect markets and oil prices and serve as a test of OPEC capability to overcome internal differences to reach a consensus-based decision.   

The OPEC session is more sensitive for Iran because failure of the conference will mean further oil price fall and deficit in the budget for development of the country on the one hand and likely challenge posed to Iran stance for restoration of the country's fair share in the oil markets, not yet attained even after cancellation of sanctions. 

This article takes a sketchy look into general condition of the oil market, focusing on stances of three important OPEC and non-OPEC states, including Saudi Arabia, Iraq and Russia. Saudi Arabia's stances are specially worth contemplating because it has reduced its oil production due to economic conditions and problems facing its oil industry, while trying to compromise with Iran. However, due to political competition of the country with Iran and the tough conditions that election of US President Donald Trump has posed to Saudi Arabia, the country might seek an excuse to harm Algeria agreement and accuse Iran and perhaps Iraq and Russia of defeating OPEC conference in cutting the production ceiling and restoration of stability in the oil market around the acceptable prices.

Global oil prices are affected by a collection of fundamental and non-fundamental variables, including world political developments that affect oil prices through forming expectations in the financial markets.

Over recent weeks, outcome of the US elections, appreciation of dollar compared to other forexes and growth of the indices of the capital and notary bond markets, affected oil prices. Trump victory in the US presidential elections led to growing insecurities in the market because he had in election campaigns pointed to energy policies and directives, which if they are enforced they would entail wide and contradictory consequences for OPEC and the world oil markets. In the past months, the US has imported 107 million barrels per month crude oil and oil products from OPEC on the average, which is 3.6 million barrels per day on the average. Saudi Arabia with 1.2 million barrels per day and Venezuela with 830,000 barrels per day supplied the highest amount of crude oil and related products to the US. So, any restriction on import of OPEC crude by the US would lead to a two-layer market worldwide and encourage harsh competition among the countries to gain a quota in other important oil markets such as China, Japan, India and the like.

So, the OPEC session will be held under conditions that international relations have changed as a result of the unexpected result of US elections and complicated relations among the OPEC members, especially political competitions of the Saudi government in the region with the Islamic Republic of Iran can affect the talks. Generally speaking, oil markets face global demand despite growing insecurities. However, the market faces oversupply and waits OPEC decision on November 30 so as to see whether the oversupply to the market will be removed. Oil market equilibrium is highly fragile now; due to the same reason, failure of OPEC in reaching a consensus for cut in the production to the level of 32.5 million barrels per day will result in the price decline. The main reason for fall in the oil prices will eventually culminate in oversupply to the market and the oversupply is expected to continue until end of 2017 in case of OPEC failure to reach an executive accord to cut the production to the specified level. 

The Petroleum Intelligence Weekly has in its November 21 2016 edition published a report in connection with the issue and said the world oversupply in October 2016 exceeded 2.5 million barrels per day. So, even fall in the OPEC production to the level of 32.5 million barrels might not be enough. If the figures OPEC sent to the Secretariat are the criteria, total OPEC production will reach about 35 million barrels. In that case, global oil supply has exceeded 100 million barrels per day ceiling in the fourth quarter of 2016. Now, regarding the oil demand, which is estimated to be 61.97 million barrels in the fourth quarter of 2016, there will be about 2.57 million barrels of oversupply, taking OPEC output standing at the level of 33.90 million barrels per day. Even if OPEC cuts its production, the non-OPEC producers will keep producing the output at a level similar to that this year, resulting in continued oversupply in the next year. Even if the IEA and OPEC predictions are true, the oversupply will be noteworthy. The estimates of both the organizations, which were cited in the monthly reports of the organizations in November 2016, point to high level of production surplus next year, supposing OPEC will not take any action. 

Oil market experts cite several reasons for seriousness and insistence of Saudi Arabia to reach an executive accord to cut the OPEC oil production ceiling. Of course, Saudi conduct after Trump election as US President has been to some extent different with that previously. It should be noted that Saudi Arabia has been facing a huge deficit and its continuation will put economy of the country under much pressure. Saudi budget deficit is estimated to be about 70 billion dollars for the current fiscal year (The MEES magazine, November 25, 2016, issue). The magazine also provides a report on negative impact of delay in Saudi government payments to the foreign contractors. The delays will make economic growth sluggish. Another point is Saudi Arabia is willing to curb growth in oil production of Iran and Iraq officially at least within framework of the OPEC accord because the two countries are the only two countries that through increase in their production capacity, stand as staunch rival to Saudi Arabia. On the other hand, despite increase in activity of the US drilling rigs and increase in oil production of the country, it seems the strategy of increase in OPEC output to push costly producers of unconventional oil from market will no longer be effective and the shale oil producers in the US have coped with current prices. So, continuation of the current strategy will have no impact on growing share of Saudi Arabia and then price rise after withdrawal of the unconventional oil producers.

Another important point with Saudi effort to forge a consensus for cut in the OPEC production is that it seems continued oil production at a level higher than 10.7 million barrels per day is growingly getting difficult for the country and possibly the country needs more time to increase its production capacity to ensure continued production to a higher level. What testifies the claim is considerable decrease in volume of Saudi crude inventories in the past nine months. Based on the Oil Market Intelligence's November 2016 report, about 55 million barrels were decreased in volume of the inventories, which is 200,000 barrels per day on the average. Probably, the reason for daily extraction of 200,000 to 300,000 barrels per day from the inventories is in fact to cover up the country's failure to continue production in the level of 10.7 million, hoping that following OPEC agreement for cutting general production ceiling , it will cut its official production to the level of about 10.3 or 10.2 million barrels per day. So, it will cite the reason as the OPEC accord and not failure to continue production in the level of 10.7 million barrels. Another testimony to Saudi decision to cut its official production, is low capacity for oversupply or the so-called spare capacity of the country. Saudi Arabia has always been keeping part of its production as spare capacity so as to maintain its position as swing producer. The average such capacity was about 2.5 million barrels per day. 

This is because it has been estimated that Saudi government will need to earn at least 60 dollars for each barrel of its crude so as to implement its half-finished projects. In that case, Saudis will try to maintain its production in the current level and also keep its oil inventories in the average level in recent years. 

As the second major OPEC oil producer, Iraq is in a times more difficult condition than that of Saudi Arabia. The OPEC production cut estimates do not take Iraq as an exemption. Recent claims of Iraqi Oil Minister  Jabbar al-Luaibi recently claimed that Iraq insists to remain exempted from the production cut plan. Iraqi Prime Minister al-Ebadi however said his country is ready to cut its output to cooperate with OPEC to restore stability in oil markets around acceptable prices. The November report of the OPEC secretariat puts Iraq production at 4.560 million barrels per day per estimates of the secondary sources and the figures released by Iraqi petroleum ministry officials put it at 4.776 million barrels per day. News agencies have over recent days quoted Iraqi petroleum ministry officials as announcing that the future OPEC conference will raise fresh proposals, hoping that the conference will help reach a consensus to implement the Algiers accord. 

Since growth in production of Iraq has been one of the main causes of growth in OPEC production and even global oil production over recent years, identification of capacities for growth of Iraq oil production to gain real estimate of the world supply-demand balance is necessary . However, evidence shows that increase in Iraq oil production in 2017 at the level of the years 2015 to 2016 will be highly  unlikely because falling oil recovery and investment due to fall in prices will affect growth in oil production. In the long run, risk and insecure political stability and delay in infrastructural projects will affect growth in oil production. In the past eight years, Iraq made hefty investment in its upstream oil activities but the investment was not reflected in its oil production capacity. The key factor for sluggish pace of development in Iraq oil production capacity was weak and improper structure which was inevitable with respect to years of the country's political and military clashes. The highest amount of damage to infrastructures was in the southern part of the country and around Basra. Everything, ranging from transportation devices and instruments, water desalination facilities, drilling and oil pipeline networks were repaired as a result and long years and hefty investment were hence needed to get them prepared for increase in the oil production.

Despite increase in oil exports, Iraqi government revenue drastically declined due to fall in oil prices. This affected prospect of oil production capacity development. Monthly revenue out of oil exports from the south was about 18.3 billion dollars in first half of 2016, that is about 60 percent less than that in 2014. However, 900,000 barrels had been added to the exports. Undoubtedly, it increased Iraqi government budget deficit, forcing it to ask international oil companies to cut their expenses. As a result investment by the upstream activities will be depleted to $14.13 billion from 21 billion dollars. In its oil contracts, Iraqi government will have to pay the cost of investment by the international companies, while paying for each barrel of oil produced. Naturally, such cuts as a result of short-term financial burden, will affect future production capacity as well. In May 2016, the International Monetary Fund agreed to payment of a loan of 5.4 billion dollars to Iraq on condition that payment of the overdue debt of international companies will be given the priority. 

Despite financial problems of the central government and Kurdistan autonomous government, Iraq oil production is growing. Production in the first half of 2015 was about 590,000 barrels more than that the year before. The increase was primarily due to increase in the production capacity in summer 2015. At any rate, the growth rate has gradually lowered and in June and July, was limited to about 140,000 barrels per day.

In general it can be said that since 2016 Iraqi oil production growth has been very sluggish and increase in capacity of production in the south was times slow in pace, with discrepancies in pipelines in Iraqi Kurdistan region. Towards 2017, it is clear that cut in production will reach the southern part of Iraq as well. The fall is the result of increasing investment in 2015 and 2016, thus neutralizing increase in production of the small fields. If oil prices go up, Iraq will be able to increase budget of international upstream companies and prevent falling rate of production. Increasing production will be possible in case of better conditions are available. So, growth in production in 2015 and 2016 should not mislead us in imagining that the growth will be easily continued in the coming years as well. Economic conditions in southern fields and growth in water and sea equipment will make progress too slow and in the north due to reassessment of future oil fields, upstream activities will not seem shining as before. A general review of Iraq oil industry condition and Iraqi government's strong dependence on oil revenues, are the reason for Iraq government to remain exempted from the production cut plan. Such conditions also point to strong need of government to increase in oil prices and revenue gained out of oil exports. So, the government's compromise in OPEC talks will be expected.

Russia's strategy in cooperating with OPEC to keep oil market stable and around acceptable prices is like strategy of Iraq. However, it has maintained a higher stand, while being outward looking. Russian President Vladimir Putin's announcing readiness to stop growth in Russia's oil production in case of OPEC agreement falls within this framework: Keeping its production level stable, Russia will overlook its planned several hundred thousand barrels increase production for 2017. In the past three years, it has lowered investment in oil upstream sectors anywhere, including in Russia. The country's capability to nullify cut in recovery and adding to oil production capacity is seriously doubted. As IEA reports, it will be unlikely for Russia to have its production show considerable growth. At any rate, 10 dollar a barrel increase in price of Russia's oil, incase of OPEC consensus on production ceiling cut, will earn the country, which is daily exporting about 4.3 million barrels of crude, an income of times more than that gained through 300,000 barrels per day increase in the production at 40 dollars a barrel. It is clear that Russia's alignment with the OPEC decision will be fully to its benefit; though, Russia had already reached agreement with OPEC but has not acted on them. Naturally, it will be ready to raise its production gradually after betterment of prices because after fall in oil prices, Russia suffered economic recession and tried to get rid of it as soon as possible.

And finally, the question is what Iran's stance in the OPEC conference might be? Regarding the above-mentioned issues, it seems that in order not to be charged of blocking OPEC consensus and causing oil price falls through insistence on its stances, Iran needs to adopt positive and well-calculated stances in the November 30 session of the OPEC.  The stance might be aimed at providing OPEC with practical support, while insisting on its stances in the past two years. In the OPEC conference, Iran can refer to the conduct of the countries that increased their production at a condition when the market faced oversupply, thus pushing down prices and eventually harsh collapse of prices and less income of the member countries. In the OPEC conference reference should be made to the countries' heavy accountability and responsibility for restoration of market stability. At the same time, Iran's getting deprived of earning income as a result of high oil prices at the time of tyrannical international sanctions should be referred to, while insisting on the proposal for Iran's getting excluded from the production freeze plan. Current economic and oil industry status of Saudi Arabia and Iraq show the two countries are most probably forced to come into terms with Iran. The two countries will be hence ready to cut their production even if Iran cuts its oil production on condition that everything is intact on the surface, while announcing that Iran has also been cooperating. The issue is of crucial importance, especially for Saudi Arabia, which has named itself the de facto leader of OPEC and has repeatedly announced that without cooperation of all the members, no agreement will be practical. There are reports that show Saudi Arabia will in this stage be ready to admit the production ceiling of 3.9 million barrels for Iran, while insisting on Iraq production cut. (Petroleum Intelligence Weekly, November 2016)

However, if such a proposal faces stern opposition and other countries ask for Iran's more cooperation, it should be conditionally agreed on Iran's keeping the current production level at 3.980 million barrels per day only for six months (until when the next conference is held) so that market is improved. So, doing Iran can contribute to success of the OPEC Conference. Iran should do it until the next OPEC conference when a more long-term decision is made on members' quota system. However, as said in the prelude, there is the least possibility for Saudi Arabia to seek an excuse in the Vienna Conference to stir order in the Conference and leave Algeria accord futile. It would try to find enough opportunity to coordinate its oil policies with the new US administration. 

Since it will imposed a high cost on the OPEC members, it will be logical to hold consultations with the allied states like Algeria, Iraq, Venezuela and the like on the issue so as to prevent Saudi Arabia of finding an excuse for its conducts.

By: Dr. Mehdi Assali, Senior Energy Economy Expert

Translator: Behnaz H. Gholipour