We are hours away from the highly anticipated OPEC meeting and oil analysts are coalescing around two possible scenarios that leave very little middle ground: if OPEC reaches a deal, oil prices could be heading well over $50 per barrel. But if the negotiations fall apart, oil prices could be heading south of $40 per barrel.
Those projections are creating a lot of volatility in the market. As of last week, oil prices were on the rise as officials from Iraq, Iran, Saudi Arabia, Russia and seemingly every other OPEC member voiced optimism and openness about reaching a deal. The mood darkened by last Friday and over the weekend as OPEC could not hammer out the stickiest of details and the key members retreated to familiar negotiating positions. Saudi Arabia cancelled the Monday meeting with non-OPEC producers and took a harder line in an effort to twist some arms. Oil prices jumped on Monday but fell by more than 3 percent by midday Tuesday as talks dragged on.
That leaves us with a much more pessimistic view regarding the odds of a deal. By Monday, a more than 10-hour meeting between OPEC members adjourned without any concrete progress. One of the thorniest issues is what to do with Iran. Iran insists that it should not be subjected to limits until it gets up to its pre-sanctions production levels of at least 4 million barrels per day. "The revival of Iran’s lost share in the oil market is the national will and demand of Iranian people," Iran’s oil minister Bijan Zanganeh said, according to the state-run news agency Shana. Related: Is There Any Hope Left For OPEC?
Even the Indonesian delegation did not sound optimistic, which is telling considering the fact that Indonesia is a net importer of oil. "The feeling today is mixed," Indonesian Energy Minister Ignasius Jonan told reporters. "I don't know. Let's see."
However, the FT reported that the top three producers struck a more flexible tone after Monday’s meeting. Sources told the FT that Iran might be willing to freeze under the 4 mb/d target that it previously set out. Saudi Arabia demanded Iran freeze at current levels – 3.7 mb/d – but the FT said that it could be open to Iran freezing at 3.8 mb/d. The gap between Iran’s and Saudi Arabia’s negotiating positions does not appear to be that large, which suggests there is hope for a compromise.
And another sign of small progress came from the other holdout, Iraq, which said that it would accept the “secondary sources” data that OPEC had been using but Iraqi officials had objected to. It’s a small bit of positive news, but suggests that Iraq is still willing to participate in a freeze or a cut that could boost prices.
Still, a much broader deal that would include cuts from non-OPEC producers seems to be off the table. Russia said that it would not attend the meeting on Wednesday, a sign that OPEC diplomats failed to bring the world’s largest oil producer on board with a much more comprehensive market intervention.
The stakes are high as oil watchers see very little chance that the markets will react with a shrug of their shoulders. Having primed the markets over the past two months, hyping the Nov. 30 meeting in Vienna, OPEC has set oil prices up for a volatile move this week.
"It's binary. If you get a deal done you affirm the case for 50 (dollars per barrel). Failure to launch, you're below 40," said Helima Croft, Global Head of Commodity Strategy at Canada's RBC Capital Markets, according to CNBC.
The price forecasts vary depending on who you ask, but they all have some variation of a sharp movement in either direction. Goldman Sachs said in a research note on Monday that oil prices will quickly rise to the low-$50s per barrel if OPEC succeeds, and the investment bank assigned a 30 percent probability to such an outcome. However, if OPEC members cannot overcome their differences, oil prices could average just $45 per barrel through the summer of 2017. Others are much gloomier.
“If OPEC does not come up with a credible agreement to cut production on Wednesday oil prices will end the year below $40 a barrel and be chasing down $30 a barrel early next year," David Hufton, CEO of PVM Group Ltd., told Bloomberg.
By Nick Cunningham of Oilprice.com
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