'Doha confirms we are now in the new normal'

The Doha meeting ended just as analysts were expecting: Basically nothing changed.

The Saudis reiterated they wouldn’t freeze production unless others (read: Iran) did, too. Meanwhile, Iran wasn’t exactly keen to cut production now that it’s finally free of sanctions.

Still, although the short-term consequences ostensibly didn’t amount to much, the Doha meeting does reveal something about what kind of world oil producers will be operating in.

“No longer can authorities dismiss the fall in oil prices as an aberration, a shale-led blip that can be ridden out using their exceptionally strong balance sheets over the course of a few years. Doha confirms we are now in the new normal,” argued Citi Research’s Farouk Soussa in a recent note to clients.

“It is the longer-term significance of the inability of global producers to curtail supply that has further reaching consequences for [Gulf Cooperation Council’s] economic policy,” he suggested.

Somewhat notably, over the weekend Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman announced a plan to transform the Kingdom’s economy in an effort to reduce reliance on oil.

The plan includes developmental, economic, and social programs, the Prince told Bloomberg. He also added that Saudi Aramco will be transformed from an oil company into “an energy and industrial conglomerate,” and reiterated the government’s promise to move forward with subsidy reforms, which officials have skirted around in the past due to their unpopularity.

“All indications are that the program aims to fundamentally overhaul Saudi’s economy and will address the structural challenges mentioned earlier,” Soussa wrote. “After Doha, Saudi can scarcely afford another damp squib.”

And it’s not just the Saudis. Soussa also noted that the regional governments of GCC countries have also responded to lower oil. For example, the UAE plans to introduce VAT in 2018.

In short, one could argued that it seems like oil producers are positioning themselves for a lower for much, much longer environment.

Interestingly, another Citi Research team, this one led by Edward L. Morse, also suggested that we were looking at a “new world order,” although they examined the situation through a more economic theory lens.

As the team explained in their note:

“This new world oil order is one where zero-sum politics have moved from producer vs. consumer relations to producer vs. producer and where the struggle involves who has the cheapest-to-produce oil. That’s actually how well-functioning markets should work and the big adjustment by producers nowadays involves finding ways to produce and to balance budgets at the same time. But that’s also an invitation to supply disruptions.”

In short, just because Doha didn’t end with any sort of deal, doesn’t mean it’s significance should be ignored.

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