(Bloomberg) -- Noureddine Boutarfa, the Algerian oil minister who hosted this week’s OPEC meeting, resorted to one of the oldest tricks in the dealmaker’s book: He put his fellow ministers in the same hotel in the middle of nowhere.
The strategy worked. Corralled on two floors of the Sheraton Club des Pins Resort, a hotel with the appearance of a corporate headquarters about a 40-minute drive from central Algiers, representatives of the Organization of Petroleum Exporting Countries had little to do except talk to each other.
Boutarfa himself left his Algiers residence to check into one of the hotel’s suites so he could mediate between regional rivals Saudi Arabia and Iran. After two days, he declared victory -- OPEC agreed Wednesday on the outlines of its first production cut in eight years. The details still need to be ironed out.
“The announcement signals that OPEC seems to be ready to return to supply management after letting the market largely re-balance itself over the past two years,’’ said Gordon Gray, global head of oil and gas equity research at HSBC Holdings Plc in London.
Despite the dramatic announcement in Algiers, which followed a nearly five-hour OPEC meeting, the seeds of a policy shift were planted months ago.
In early May, Ali Al-Naimi, the architect of the pump-at-will policy OPEC adopted in late 2014, retired after 20 years as Saudi oil minister. His successor, Khalid Al-Falih, initially supported the policy he inherited from Al-Naimi, but he also wanted to make his own mark, according to people familiar with the Saudi’s thinking who asked not to be named.
Al-Falih started his tenure by trying to repair his country’s relations within the organization, particularly with Iran and Venezuela, during the June OPEC meeting in Vienna. He also encouraged ongoing back-channel conversations involving Qatar, Algeria, Russia and Iran.
By the middle of August, Riyadh had determined that its strained economy needed a boost that higher oil prices could provide -- not a return to the old days of $100-plus a barrel, necessarily, but certainly something higher than $50 a barrel. Without an intervention, the risk was a return to prices below $40 a barrel and the looming specter of more unpopular domestic austerity measures. In addition, Saudi Arabia started to worry that current prices would reduce further investment in new energy projects, contributing to an uncontrollable boom cycle.
But Saudi Arabia and Iran remained far apart. Tehran insisted on accommodations because of its emergence from nuclear sanctions, which curbed its production for years, according to a person briefed by Iranian officials. Iran argued that Saudi Arabia should cut its output back below 10 million barrels a day. The countries had differing views of what Iran should produce. Riyadh wanted Tehran to freeze at a level of 3.6 million barrels per day, while Iran insisted on production of at least 4.2 million barrels.
The gap narrowed in meetings in Moscow, Paris and Vienna. But as recently as a month ago, the difference between Saudi Arabia and Iran was still roughly 1 million barrels a day, about the same output of fellow OPEC member Algeria.
Government officials got involved. At the G20 summit in Hangzhou, China, in early September, Russian leader Vladimir Putin sat down with Saudi Arabia Deputy Crown Prince Mohammed bin Salman. Hours later, Saudi and Russian oil ministers appeared in a joint press conference. The message was clear: Riyadh and Moscow were working together.
The final push came over the last 10 days, with a two-day secret meeting in Vienna involving senior Saudi, Iranian, Qatari and Algerian delegates. The officials didn’t manage to resolve all their problems, but they narrowed the gap between Riyadh and Tehran to about 600,000 barrels a day.
On the eve of the OPEC talks in Algiers, Al-Falih made a final concession, for the first time saying that Iran -- alongside Libya and Nigeria -- should be allowed to “produce at the maximum levels that make sense.’’
The olive branch was well-received. By the time OPEC ministers gathered on Wednesday afternoon, the gap was cut to only 200,000 to 400,000 barrels a day, according to people briefed on the matter. Bijan Namdar Zanganeh, the Iranian oil minister, signaled the rapidly shifting talks.
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Copyright 2016 Bloomberg News.
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