The Fuse

OPEC Secretary-General Cautiously Confident About Output ‘Freeze,’ Price Rebound

by Matt Piotrowski | February 22, 2016

The production “freeze” that has been agreed to by four major oil producing countries is the first step toward increased coordination to rebalance today’s global oil market, according to OPEC’s top official.

OPEC’s Secretary-General Abdallah El-Badri told the IHS CERAWeek audience in Houston on Monday that OPEC has been meeting with non-OPEC members for some time in order to take action to deal with the problem of today’s oversupply that has driven oil prices down to the $30 level. He argues the freeze is “the first step to see what we can achieve,” adding that producers will review the action in the coming months to see how successful it’s been and what the next steps will be. “Maybe this will trigger” some more actions to bring a “solution” to the “problem” of low prices and sloppy oil market fundamentals.

The current production freeze is an agreement from three OPEC members—Saudi Arabia, Qatar, and Venezuela—and Russia to hold output at January’s levels in order to keep the global supply overhang from growing.

Despite El-Badri being positive about a handful of producers capping output, he admitted a number of times that he had little insight into the direction of the oil market.

Despite El-Badri being positive about a handful of producers capping output, he admitted a number of times that he had little insight into the direction of the oil market. “Nobody can tell you what’s going on in the oil market,” he told the conference. He also noted that OPEC was taken by surprise by how sharply oil prices fell since its seminal meeting in November 2014, when the cartel—led by Saudi Arabia—decided to keep the spigots open instead of throttling back to shore up prices. Oil is now trading around $33-$35, down from $105-$115 in the middle of 2014.

When asked about where oil prices would be in a year’s time, El-Badri told reporters at a press conference that if he knew where oil prices were headed, he would quit OPEC.

OPEC has been talking to a wide variety of producers to figure out how to deal with the current oil market, the secretary-general noted, adding that he hopes prices will rebound before 2017, but admitted that managing the market now is a daunting task given that there is currently a 300 million barrel overhang.

OPEC and shale struggling to coexist

El-Badri made the point, both on stage in front of the conference and to reporters afterward, that OPEC is talking to all producers throughout the world. All but one, that is: The group has not had any discussion with the U.S. government or U.S. producers on how to stabilize oil prices. Many commentators have said that the current oil market is a war of attrition between OPEC members and U.S. companies that produce high-cost shale oil.  However, “everyone is suffering,” El-Badri stated. “We talk to everyone but the U.S.,” he said, but he was quick to note that OPEC would like to begin a dialogue with the U.S., given how big of a role shale is now playing in the global oil market.

“We talk to everyone but the U.S.,” he said, but he was quick to note that OPEC would like to begin a dialogue with the U.S., given how big of a role shale is now playing in the global oil market.

An OPEC official speaking in the heart of the U.S.’ oil industry is always noteworthy, but more so right now when all producers are suffering financially and a number of commentators believe the cartel is trying to put U.S. companies out of business. When asked whether he had any advice for U.S. producers, whose costs are much higher than those in OPEC, El-Badri said no one can advise U.S., or Texan, companies because of their stellar history and that the cartel admires their technology and hopes to learn from them during the current downturn.

The biggest problem with the freeze strategy is that Iraq and Iran—the two OPEC members seeing the strongest supply growth—have not joined in the cooperation. El-Badri is confident that they could be part of a broader coordination: “They did not refuse but encouraged this activity. Iran and Iraq listened and will reply later.”

What’s the measure of success for any production freeze, or a possible cut? El-Badri said that any successful action would have to include both OPEC and non-OPEC producers and that today’s current supply overhang could not be handled by OPEC members alone. He was adamant that the days of OPEC stepping in unilaterally to stabilize the market are over, and added that if the participants in the freeze agreement did not increase production in 3-4 months, it would be a notable first step. At that point, further collaboration would be discussed, if conditions were met, likely at the next OPEC meeting in June.

El-Badri explained the current dilemma among oil producers, showing why a production freeze is important as an initial step toward a market rebalancing. “When there’s a lower price, companies and countries increase production” to make up for lost revenue, leading to an even bigger oversupply.

Interests of producers and consumers more closely aligned

Now that many oil producers are becoming bigger consumers, and major consuming countries are now energy superpowers, the interests of organizations that represent different sides are starting to converge. The International Energy Agency’s Fatih Birol, who shared the stage with El-Badri on Monday, said the impact of the production freeze would be limited, taking a less positive view than El-Badri, but the two highlighted similar worrisome risks from today’s low prices that negatively affect producers and consumers alike.

El-Badri and Birol agreed that today’s low oil price is setting the stage for a price spike later on. Both warned of the longer-term consequences of today’s low price environment. Echoing Birol’s worries about underinvestment, El-Badri said that the industry cutting back today is “a seed for a very high price in the future.”

“We [OPEC] are not dead—we are alive, we are alive, we are alive. You will see us for years.”

With all the talk of consumer countries moving away from oil and other fossil fuels, El-Badri had a word of caution. He noted that some 80 percent of today’s energy demand is met by fossil fuels, and a transition away from these fuels will not happen in the foreseeable future. He also had a message for skeptics of the cartel, particularly commentators who believe the group is irrelevant since it has not decided to stabilize the market and low oil prices persist. When speaking to reporters, he reminded them that many have stated OPEC was dead before, during previous price downturns. “We [OPEC] are not dead—we are alive, we are alive, we are alive. You will see us for years.”