EghtesadOnline: Saudi Oil Minister Khalid Al-Falih emerged from the OPEC meeting room on Saturday evening having endured months of secret petro-diplomacy, late-night phone calls and, a few times, disagreements that almost saw talks collapse. But he was still smiling.
Determined to end a two-year oil market slump, Al-Falih and his Russian counterpart Alexander Novak had just brokered the first global petroleum-cuts deal in 15 years. It involved roughly 60 percent of the world’s oil production, from tiny Brunei and Equatorial Guinea to OPEC giants Iran and Iraq, according to Bloomberg.
The Saudi minister wasn’t done yet. Taking his place at the post-meeting press conference at OPEC’s headquarters in Vienna, Al-Falih showed he was deadly serious about finally fixing the global oil market. First, he was willing to cut the kingdom’s production even deeper than already promised. Second, Riyadh and Moscow were setting aside their historic rivalry as energy suppliers and the toxic politics of Syria to reassert their authority over the world’s most important commodity.
“In coming out with such a strong statement, Khalid Al-Falih had something of Mario Draghi’s ‘whatever it takes’ moment,” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC, referring to the ECB president’s pledge to save the single currency at the height of the euro-zone crisis in 2012.
Both Al-Falih, who only took office in May, and Novak were keen to talk up the day’s significance.
On his Twitter account, Al-Falih described the deal as "historic," posting a picture of himself smiling. At the press conference, Novak was exultant.
“I’m glad that we’ve come through this long way and that we’ve eventually finished this,” the Russian minister said. “But this is not the end of this route, we have a big joint work to do to carry out the agreement.”
The oil market is likely to react with a blend of skepticism -- after all, OPEC has a long history of cheating and both Russia and Saudi Arabia are pumping at near record levels -- and anxiety that the world’s two largest exporters mean business. If all the 24 nations involved in Saturday’s deal deliver on their promises, the market could turn from three years of oversupply into deficit in the next few months.
Prices have already doubled since January and a further run up would be felt through the global economy -- relieving pressure on the budgets of oil producers and squeezing the spending power of consumers. It would also be a fillip to oil companies from majors such as Royal Dutch Shell Plc to shale producers like Whiting Petroleum Corp.
The deal between the world’s two biggest energy producers was praised by Al-Falih’s OPEC peer, Emmanuel Kachikwu, the petroleum minister for Nigeria.
“Saudi Arabia is certainly taking a strong leadership on this, putting a lot of reputation behind these numbers, and wanted to make sure that it succeeds,” Kachikwu said in a Bloomberg Television interview on Monday. “And I think Russia is following suit. If you have these big jumbo producers in the block, then something should happen.”
Crude futures jumped to the highest since July 2015 on Monday as trading resumed and analysts say further gains are possible. Brent surged as much as 6.6 percent to $57.89 a barrel and was at $56.60 a barrel at 11:08 a.m. in London. West Texas Intermediate advanced as much as 5.8 percent, the biggest gain since the Nov. 30 OPEC deal.
Saturday’s success was all the more striking because it followed failure earlier in the year. In April, after months of diplomatic work, Qatar had arranged a deal for major oil countries to freeze output, but Saudi Arabia balked at the very last minute, sinking the accord.
Novak acknowledged on Saturday that the Doha collapse left “some bad taste in mouth," but low oil prices made a renewed effort imperative for both countries. Saudi Arabia and Russia face fiscal challenges and their economies are slowing.
After months of shuttle diplomacy, including secret meetings and late calls that the ministers acknowledged publicly for the first time on Saturday, Riyadh and Moscow announced the outline of a deal at OPEC’s Nov. 30 meeting in Vienna.
Saudi Arabia and fellow OPEC members, including Iraq, agreed their first production cut since the global financial crisis eight years ago. In total, the group pledged to reduce output by 1.2 million barrels a day, with Riyadh cutting more than 450,000 barrels a day to just under 10.1 million.
Then on Saturday, Russia delivered its side of the bargain, confirming its commitment to cut 300,000 barrels a day and bringing along a collection of other non-OPEC countries that added another 258,000 barrels in cuts.
“This is an agreement between the four major producers, Iraq, Iraq, Saudi and Russia,” said Yasser Elguindi, managing director of Medley Global Advisers LLC. “And when you consider that politically these four countries are on opposite sides of every major political issue in the Middle East, it’s quite remarkable they were able to put aside their differences to reach a mutually beneficial agreement.”
While the non-OPEC deal included some creative accounting, allowing countries such as Mexico and Azerbaijan to dress up natural declines in production as actual output cuts, it gave Al-Falih the confidence to announce that Saudi Arabia was prepared to cut deeper if needed to bring the market back into balance.
"I can tell you with absolute certainty that effective Jan. 1 we’re going to cut and cut substantially to be below the level that we have committed to on Nov. 30," he said, signaling that if the market demanded it, he was ready go below 10 million barrels -- a level it has sustained since March 2015.
The success or failure of Al-Falih’s strategy will probably be determined in the U.S. At Saturday’s press conference he said that he didn’t expect a big supply response to higher prices from America’s shale producers in 2017. But with drillers putting more rigs back to work every week, that could prove optimistic.