OPEC watch list: The battle of Algiers – RBC CM

Research Team at RBC Capital Markets, suggests that the oil market is eagerly watching to see if the cash-strapped sovereign producers will be able to reach the collective output agreement that eluded them in Doha.

Key Quotes

“This time, we believe that the environment is more conducive to some type of deal, and if there is not enough time to iron out all the details, the ensuing statement will strongly suggest a willingness to act at the November meeting (assuming that market conditions remain challenging). Perhaps most compelling, many of the biggest and most influential producers are close to maxing out and hence may judge that there is little downside to agreeing to some sort of market management.

In April, Iran was adamant that it would not freeze production at January levels when it was still in the midst of a post-sanctions ramp-up. Iranian non-participation in turn caused regional rival Saudi Arabia to walk away from the table at the last minute, despite the rest of OPEC and Russia wanting a deal. This time, there have even been prep meetings in Vienna between Saudi Arabia, Qatar and Iran. The fact that Iran is on the cusp of producing at pre-sanctions levels and may have little nearterm available growth left likely accounts for some of its changing posture.

The emphasis on “fair quota” may signal that Iran will try to secure the right to increase output by several hundred thousand additional barrels in keeping with their goal of reaching pre-sanctions levels. We believe that Iranian acquiescence will be essential in getting Saudi Arabia, the driver of the OPEC bus, to play ball. To that end, senior Saudi officials have recently seemed more supportive of bringing back market management measures to reduce volatility and have consistently talked of the need for higher oil prices to ensure enough upstream investment.

The key Saudi decision maker, MBS, has not publicly spoken on the matter, like he did days before Doha when he definitively drew the line in the sand on Iranian involvement. That said, we do not believe that either his handpicked energy minster or foreign minister would speak on such an important matter without his consent. It is worth remembering that Saudi Arabia was seemingly amendable to bringing back the collective OPEC output ceiling at the June meeting. It was the Iranians who nixed that idea on the grounds that there was no individual accountability with a collective ceiling and instead called for the return of the country quotas that were abandoned in 2011. At the time, Venezuela floated the idea of a middle ground position, individual country production bands in which the output target could be adjusted based on internal circumstances and market dynamics. We believe that such a compromise could form the basis of an eventual agreement.

Providing an individual output range could work not only for the Iranians, but also for countries like Libya and Nigeria which have significant numbers of barrels shut in for security reasons. Of course, given the dismal relations between Saudi and Iran and the ongoing proxy battles raging in Syria and Yemen, it may yet prove too hard to get these two rivals to separate oil policy from broader geopolitical considerations. Yet, given the fact that all these countries would benefit domestically from additional revenue and that no country is being asked to actually cut output, we believe that the odds are in favor of them opting for pragmatism and essentially codifying their current production levels.

We think the likelihood of such an arrangement will obviously increase if the cartel concludes that the anticipated rebound to the $50s/bbl range looks increasingly difficult. Moreover, if they cannot get all the details ironed out in Algiers next week, we expect some sort of statement signaling a determination to work towards a new market management mechanism by the November meeting.”