Crude Prices Drop on OPEC Accord Uncertainty

Saudi Arabia pulls out of talks with non-OPEC producers, including Russia

International crude oil prices witnessed the biggest loss in more than two months on Thursday, November 24th, 2016, on doubts that the Organization of the Petroleum Exporting Countries (OPEC) would reach an accord to cut production, even as planned talks between OPEC and non-OPEC producers was canceled, as reported by Bloomberg. Futures fell 4.3% after Saudi Arabia pulled out of talks with non-OPEC producers, including Russia, scheduled for Monday, November 28th, 2016, over disagreements on how to share the burden of supply cuts. OPEC’s final efforts to implement its September 2016 Algiers supply accord and boost oil prices shifted the focus to Iran and Russia, even as Iraq appeared to agree to output cuts.

Source: Bloomberg
Source: Bloomberg

OPEC continued to make diplomatic efforts with all its member countries to reach a consensus to cut crude production and drag the market out of a two-year downturn. In late September, OPEC agreed the outline of its first production curbs since the global financial crisis in 2008. Since then, OPEC members have spent two months deliberating on how to share the output cuts, which would bring its production to a range of 32.5 million to 33 million barrels per day (bpd). OPEC pumped an estimated 33.6 million bpd in October 2016.

Among the OPEC nations, Saudi Arabia is pushing for an output reduction, while Iran is insisting it should be allowed to keep increasing output. Also, Saudi Arabia wants an OPEC deal in place before talking with other producers such as Russia. In the meantime, Russia’s stance to freeze supply at record levels instead of cutting output is also not going down well with some members. OPEC members Libya and Nigeria are exempted from cuts and are raising their output amidst a scenario of a global crude oil glut that continues to drag down prices.

West Texas Intermediate for January delivery dropped $1.90 to $46.06 a barrel on the New York Mercantile Exchange on November 24th, 2016. Brent for January settlement fell 3.6% to $47.24 a barrel on the London-based ICE Futures Europe exchange. The global benchmark traded at a $1.18 premium to WTI. Brent fell 3.84% to $47.12 a barrel on November 25th, 2016, while West Texas Intermediate fell to $45.96 a barrel.

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Russia, Iran pose obstacles to clinch deal

OPEC has asked non-OPEC countries such as Russia to curb output by 500,000 barrels a day. Russia held steady to its stance to freeze oil production at current levels, arguing that the offer amounted to a cut compared with its 2017 plans. Iraq, the second-largest producer after Saudi Arabia among the OPEC nations, has reiterated its agreement to the output curb. However, Iraq has argued that the OPEC supply estimates that would form the basis of output cuts would underestimate its overall production numbers. However, Iran, the group’s third-largest producer, is insisting it should be allowed to keep increasing output to pre-sanctions levels of about 4 million bpd.

Iran assesses OPEC proposal

Iran is also assessing a proposal for a collective OPEC output cut, without making any commitment to reduce its own production ahead of the crucial meeting in Vienna on November 30th, 2016. Algerian Energy Minister Noureddine Boutarfa presented a proposal for an OPEC cut of 1.1 million bpd during a meeting with his Iranian counterpart Bijan Namdar Zanganeh in Tehran on Saturday, November 26th, 2016. OPEC is also proposing a 600,000 bpd output cut by non-OPEC producers. An oil production cut would help the oil price to rise to $55 to $60 a barrel; however, if no agreement is reached in Vienna next week, the price may remain below $50 a barrel or plunge lower for the near term as the global glut increases.

Source: International Energy Agency, Bloomberg
Source: International Energy Agency, Bloomberg

With less than a week left for the crucial Vienna meeting, the refusal of just one major producer to participate in the output curb could scuttle the agreement reached in September in Algiers.

Vienna meet poses cliffhanger

With Saudi Arabia pulling out of planned talks with non-OPEC nations, including Russia, over disagreements on how to share the burden of supply cuts, the Vienna meeting indeed poses a cliffhanger of sorts. Meanwhile, economists believe that an OPEC deal to curb oil supply may only push up prices by a couple of dollars as the U.S. moves to expand its market share, and that the OPEC cut may not materially alter the global oil balance and reduce oil inventories that have been ailing the oil industry over the past two years. That being said, the International Energy Agency predicts that without an OPEC deal in place over the next few days, 2017 will be the fourth consecutive year in which supply runs ahead of demand, potentially causing lower prices.

It now remains to be seen whether internal meetings among the member nations could result in an early resolution of differences and pave the way for a meaningful conclusion at the Vienna meet on November 30th, 2016.

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