Two months ago, OPEC took the market by surprise by saying that it ‘agreed to agree’ on a deal to cut production to between 32.5 and 33.0 million bpd in a bid to reduce oversupply and lift oil prices. Two months later, exactly to the date, the cartel has not yet reached any agreement on the specifics of a possible deal. A marathon meeting of OPEC experts on Monday failed to reach an agreement for OPEC ministers to discuss on Wednesday.
For two months OPEC officials and non-OPEC producers such as Russia have been vague on details and grand on hollow comments, hints, suggestions, and optimism that a deal will be reached.
Analysts are a bit more optimistic now than they were in late September. However, it seems that the rift between OPEC’s biggest three - Saudi Arabia on the one hand, and Iran and Iraq on the other hand - is just as wide as it was two months ago.
The chances of OPEC ministers reaching a deal on Wednesday are still pretty much 50/50, Amrita Sen, chief oil analyst at Energy Aspects, said in an interview with Bloomberg on Monday. Should a deal fail, however, the oil market will see a “sharp correction” and oil prices may plunge to US$20, Sen noted. A no-deal would be met with a very negative perception by the market, and the impression OPEC would be leaving is that this is the end of the cartel, the analyst said.
Essentially, all want to cut but there are no details, the analyst went on to comment on OPEC’s bumpy road to the Vienna meeting.
Essentially, the showdown (again) comes down to the Saudi vs. Iran-Iraq positions. Related: Iran Won’t Cut, Boldly Ask Saudis To Cut 1 Million Bpd
The Saudis would like to see oil at US$60, but this time around, they seem firm in their stance that they won’t do all the cutting, as they have traditionally done, and as Iran and Iraq are probably expecting them to do again. Saudi Arabia needs higher oil prices to shore up the budget gap that has opened with the oil price crash. Iran and Iraq are digging in their heels and are pleading exemptions, hoping to put the Saudis in a corner and expecting them to do the cuts, again.
The Saudis, on the other hand, are not having their bitter regional rival Iran staying exempt from OPEC actions and reaching pre-sanction levels.
According to a ZeroHedge tweet from Monday, the Saudis have reportedly offered Iran to freeze at 3.7 million bpd, below Tehran’s ask of 3.97 million bpd.
Iraq, for its part, is seeking a freeze at 4.546 million bpd, according to Dow Jones. Other OPEC members, especially the Saudis, are not too benevolent to let such Iraqi proposal for just a freeze pass. Related: Shell Considering Dumping Its Iraqi Oil Fields
The internal OPEC discord is not that there isn’t lack of will, or lack of logic, it’s about the “political baggage of those countries”, according to Energy Aspects’ analyst Sen.
Saudi Arabia, which has been trying to get all OPEC members on board on a collective action, changed the rhetoric two days ago, with its oil minister Khalid al-Falih saying that OPEC does not actually need to cut production to rebalance the markets.
The Saudis, however, need higher oil prices, with their budget revenues shrinking due to lower prices. The question is: will they be able to overcome regional and political differences in the name of the higher oil price? Will an OPEC-only cut (if member countries agree to and stick to it, that is) help rebalance the oil market? Will the cartel need a little helping hand from Russia, for example, to tip the supply-demand fundamentals? Will Russia go beyond just ‘joining efforts’ to reduce supply only after it sees a real OPEC deal?
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The bad news is that there are too many conundrums left to solve less than 24 hours before Wednesday’s meeting. The good news is that we’ll only have to wait for one day - not two months - to see if OPEC can get things done this time around.
By Tsvetana Paraskova for Oilprice.com
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The massive decrease in spending on oil exploration and production will begin to bite in a few years, and we could easily see another spike in prices over $100