Rashid Husain Syed is a journalist, energy analyst and consultant based in Toronto. For almost 25 years, he served as vice-president of a leading Saudi trading and consulting house.
Proving pundits wrong and overcoming skepticism, two days of round-the-clock deliberations in Algiers brought about a landmark agreement in which the Organization of Petroleum Exporting Countries agreed to slash output. The decision marks the end of the battle for market share.
"This is the end of the 'production war' – OPEC claims victory," Phil Flynn, analyst at Chicago-based brokerage Price Futures Group, told Reuters. "The cartel proved that it still matters, even in the age of shale."
Output will be slashed to 32.5 million barrels a day. In August, OPEC averaged 33.24 million barrels a day.
"We have decided to decrease the production around 700,000 [barrels a day]," Iranian Oil Minister Bijan Zanganeh told reporters after the meeting. "OPEC made an exceptional decision today. … After 2 1/2 years, OPEC reached consensus to manage the market," he emphasized.
Apparently a sense of urgency had crept into OPEC ranks as officials sat down in Algiers for the marathon talks. "Our expectations about the rebalancing process have shifted," OPEC president Mohammed Bin Saleh al-Sada said in his inaugural address, before the closed-door session.
"It is evident that there is now a greater degree of urgency to ensure the market returns to balance as quickly as possible," he said.
Saudi Energy Minister Khalid al-Falih, the most influential voice in the meeting room, also added his weight. "We need a gentle adjustment to reassure the market," he said at a briefing while flanked by Russian counterpart Alexander Novak.
With many predicting the cartel's end, OPEC needed to act – a fact both realized and conceded.
Behind the scenes, diplomacy was in overdrive. Mr. Novak, Russia's Energy Minister, met Mr. Zanganeh on Tuesday in what was reported to be a "new attempt to persuade Tehran to play ball." Several other sources quoted by Reuters said Algeria and Qatar were also talking to Iran in a bid to rescue a deal.
The results were evident even before formal news of deal. For the first time, Iran indicated that it was ready. Mr. Zanganeh said his country would agree to curb production at close to four million barrels a day. The remarks represented a narrowing of the gap between Iran and Saudi Arabia.
Earlier Tuesday, Mr. al-Falih publicly conceded that Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits, which could be set as early as the next OPEC meeting in November.
That represented a strategic shift in Riyadh's position, too. Until then, the Saudis had emphasized that they would reduce output to ease a global glut only if all other OPEC and non-OPEC producers followed suit. Iran, however, had argued that it should be exempted from such limits as its production recovers after the lifting of sanctions on its oil trade.
Michael Wittner, global head of oil research at Société Générale in New York, thus had a point when he told a reporter that the deal to reduce output could "potentially be very significant" – not just for the number of barrels it could take out of production, but also because it signals that Saudi Arabia is considering a return to active supply management. "To me, the significance is way beyond that – they all sat down in a room and made a decision."
The decision had an immediate impact. Markets surged. Prices spiked by almost 6 per cent. By Wednesday evening, Brent crude settled up by $2.72 (U.S.) – 5.9 per cent – at $48.69 a barrel, after hitting a two-week-plus high of $48.96. U.S. West Texas intermediate crude also rose by $2.38 – 5.3 per cent – to settle at $47.05, after a peak of $47.45, its highest since Sept. 8.
Interestingly, on the day OPEC acted, the U.S. Energy Information Administration also released its oil reserves data, underlining that U.S. crude supplies fell by 1.9 million barrels in the week ending Sept. 23. To some, it reflected tightening markets, especially if OPEC succeeds in implementing the true spirit of Algiers.
Despite all the obituaries, the cartel remains alive. OPEC is still relevant.