Going into the Algiers OPEC meeting in late September, the prevailing sentiment among the analyst community was that there is no way any deal will get done: after all there was no secret that the recent animosity between Iran and Saudi Arabia had recent reached unprecedented levels, with both side directly involved across from each other in the Syrian proxy war.
However, the deal did happened, surprising virtually everyone, and based on a new Reuters report, it was thanks to one man.
Russian President Vladimir Putin was the mediator who played a crucial role in helping OPEC rivals Iran and Saudi Arabia set aside differences to forge the cartel’s first deal with non-OPEC Russia in 15 years.
The interventions ahead of Wednesday’s OPEC meeting came at key moments from Putin, Saudi Deputy Crown Prince Mohammed bin Salman and Iran’s Supreme Leader Ayatollah Ali Khamenei and President Hassan Rouhani, OPEC and non-OPEC sources said. According to Reuters, Putin’s role as intermediary between Riyadh and Tehran was pivotal, and is a “testament to the rising influence of Russia in the Middle East since its military intervention in the Syrian civil war just over a year ago.“
It started when Putin met Saudi Prince Mohammed in September on the sidelines of a G20 gathering in China. The two leaders, who realized they stand to benefit more from cooperating in order to push prices higher, agreed to work together to help world oil markets clear a glut that had more than halved oil prices since 2014, pummeling Russian and Saudi government revenues.
The financial pain made a deal possible despite the huge political differences between Russia and Saudi over the civil war in Syria.
“Putin wants the deal. Full stop. Russian companies will have to cut production,” said a Russian energy source briefed on the discussions. Of course, Russia’s energy minister Novak has already said that it will take a long time before Russia’s fulfills its production cut quota of cutting 0.3tb/d from its current production level of 11.2tb/d due to “technical complications” suggesting that Russia is perfectly happy to sit back and watch how the world reacts to the OPEC cut first before engaging following through on its promises. After all, there is potential Saudi market share to be gained.
But first, prices had to go up.
The back story is familiar to all who have followed the endless OPEC melodrama of 2016: in September, OPEC agreed in principle at a meeting in Algiers to reduce output for the first time since the 2008 financial crisis. But the individual country commitments required to finalize a deal at Wednesday’s Vienna meeting still required much diplomacy.
Recent OPEC meetings have failed because of arguments between de facto leader Saudi Arabia and third-largest producer Iran. Tehran has long argued OPEC should not prevent it restoring output lost during years of Western sanctions. Then there is raging animosity between the two nations: proxy wars in Syria and Yemen have exacerbated decades of tensions between the Saudi Sunni kingdom and the Iranian Shi’ite Islamic republic.
Threatening a repeat of the April OPEC meeting which achieved nothing, heading into the Vienna summit, the signs were not good. Oil markets went into reverse. Saudi Prince Mohammed had repeatedly demanded Iran participate in supply cuts. Saudi and Iranian OPEC negotiators had argued in circles in the run-up to the meeting.
And, then, just a few days beforehand, Riyadh appeared back away from a deal, threatening to boost production if Iran failed to contribute cuts.
That’s when the Russian leader stepped in.
Putin established that the Saudis would shoulder the lion’s share of cuts, as long as Riyadh wasn’t seen to be making too large a concession to Iran. A deal was possible if Iran didn’t celebrate victory over the Saudis. A phone call between Putin and Iranian President Rouhani smoothed the way, Reuters reports. After the call, Rouhani and oil minister Bijan Zanganeh went to their supreme leader for approval, a source close to the Ayatollah said.
“During the meeting, the leader Khamenei underlined the importance of sticking to Iran’s red line, which was not yielding to political pressures and not to accept any cut in Vienna,” the source said.
“Zanganeh thoroughly explained his strategy … and got the leader’s approval. Also it was agreed that political lobbying was important, especially with Mr. Putin, and again the Leader approved it,” said the source.
On Wednesday, the Saudis agreed to cut production heavily, taking “a big hit” in the words of energy minister Khalid al-Falih – while Iran was allowed to slightly boost output.
Iran’s Zanganeh kept a low profile during the meeting, OPEC delegates said. Zanganeh had already agreed the deal the night before, with Algeria helping mediate, and he was careful not to make a fuss about it.
As we showed yesterday, the resolution culminated in an oil production table with a deliberate “error” in it” – while Iran’s reference level was picked based on directly communicated data, at just under 4mmb/d, the adjustment was applied to the “secondary” reported data, some 400kb/d lower, allowing Iran to present the deal as a victory to the people as it was the only nation that had a “positive” adjustment, while Saudi Arabia would demonstrate that Iran’s effective production level was 200kbpd lower than its reference point.
After the meeting, Reuters notes, the usually combative Zanganeh avoided any comment that might be read as claiming victory over Riyadh. “We were firm,” he told state television. “The call between Rouhani and Putin played a major role … After the call, Russia backed the cut.“
There was one problem: a last-minute quarrel threatened to derail the deal when Iraq became a problem (just as we warned would happen in September).
As ministerial talks got underway, OPEC’s second-largest producer insisted it could not afford to cut output, given the cost of its war against Islamic State.
But, facing pressure from the rest of OPEC to contribute a cut, Iraqi Oil Minister Jabar Ali al-Luaibi picked up the phone in front of his peers to call his prime minister, Haider al-Abadi. “Abadi said: ‘Get the deal done’. And that was it,” one OPEC source said.
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Will the deal last? It is unclear – many say that due to the inherently unstable game theory involved in the deal, there is very little chance that some or all deal participants won’t cheat, dooming the agreement to failure. However, one thing is certain: with oil up over 4% today, following yesterday’s 9% gain, the head of the world’s largest oil exporter – having masterminded the Vienna deal at a time when both OPEC and Russia are pumping record amounts of oil – is smiling.
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