After two months of trying to convince its OPEC peers to get on board with a production cut, it could end up being Saudi Arabia that walks away from a deal, sending oil prices tumbling back down to the low $40s or worse.
Saudi Arabia led the charge on the Algiers agreement in September, making big concessions and appearing to take on most of the burden of reducing oil production. After two years of pursuing market share in a world of low oil prices, the Saudis abruptly changed their approach, hoping to boost prices by getting OPEC members to agree to lower output. But they left the messy details to be completed at a later date, hoping to use the interim period between Algiers and the Nov. 30 meeting in Vienna to cajole and convince other OPEC members to agree to the necessary cuts that would create a credible deal that could turn the oil market around.
Sensing Saudi Arabia’s desperation, Iraq and Iran drew harder lines on their own output over the past two months, and both demanded to be exempted from a final deal. Iraq also disputed the production data that OPEC was using, and it remains unclear if those disparities have been resolved. To the extent that either country is willing to make a sacrifice, it appears that they are only wiling to freeze rather than cut.
With OPEC’s second and third largest members unwilling to make any real concessions to date, it is difficult to imagine any result from Vienna will be a game-changer for the oil markets. Other members such as Nigeria and Libya are not going to be subjected to any cuts. The remaining members outside of a few Gulf States were never going to be able to make any serious reductions either. Without Iraq and Iran, Saudi Arabia will have to do all the work – cutting between 600,000 and 1.1 million barrels per day – by itself, which might be too painful economically and embarrassing politically. Related: Is The Permian 20 Billion Barrel Oil Discovery Real
The lesson from the 1980s for the Saudis is that cutting unilaterally may not rescue oil prices, and it could even offer an opportunity for rival producers to steal market share. They have kept that lesson in mind over the past two years, and if Iraq and Iran decline to participate, it is unclear if Saudi Arabia is ready to go it alone. “If they are going to cut their production, the Saudis don’t want others to replace them,” an unnamed OPEC official told The Wall Street Journal.
As a result, Saudi Arabia has tried to draw a line in the sand just a few days before the highly anticipated meeting in Vienna. OPEC’s top oil producer has suggested that it is prepared to walk away from a deal unless other members step up to the plate, the logic being that the resulting oil price meltdown will be more painful for Iraq and Iran than it would be for Saudi Arabia. Saudi officials cancelled a meeting with non-OPEC producers that was scheduled for Monday, a surprise move that casted doubt on the chances of a deal this week by highlighting the gulf that still exists between various OPEC members. Oil prices plunged at the end of last week. On Monday, the energy ministers from Algeria and Venezuela flew to Moscow to try to convince Russia to participate in output cuts. Meanwhile, OPEC members are locked in another round of negotiations at the start of this week.
By Sunday, Saudi Arabia’s oil minister Khalid al-Falih said that the oil markets will reach a balance in 2017 even if OPEC did not cut output, a remarkable statement that seems to be an attempt to lay the rhetorical groundwork to limit the fallout from a failed meeting this week.
"We expect the level of demand to be encouraging in 2017, and the market will reach balance in 2017 even if there is no intervention by OPEC. But OPEC intervention aims to expedite this balance and the market recovery at a faster pace," al-Falih said to reporters. "I don't think that we have one path only in OPEC meetings, which is cutting production - I think maintaining production at current levels is justifiable, taking into consideration the recovery of consumption and growth in developing markets and the United States.”
Al-Falih might not be confident that OPEC members will reach a deal, so he is downplaying the significance of the meeting altogether. Or, viewed another way, he is stepping up the pressure on Iraq and Iran to play ball by conveying a sense of indifference if the deal falls apart.
We will probably have to wait until later this week to see whether or not Iraq and Iran will give in or will call Saudi Arabia’s bluff.
By Nick Cunningham, Oilprice.com
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