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OPEC members fail to reconcile differences as oil price recovery hangs in the balance

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OPEC officials failed to reach an accord on production cuts ahead of a critical meeting this week, putting the fate of a long-awaited price recovery in jeopardy.

Tensions were high early this week ahead of OPEC’s Wednesday meeting in Vienna, as top exporter Saudi Arabia has suggested output curbs were not essential to rebalance oil markets. That marks a reversal from what was being said in September after the group’s last meeting in Algiers, when OPEC members agreed to cap output at 32.5-33 million barrels per day versus the current 33.64 million barrels to lift oil prices, which have declined more than 50 percent since the summer of 2014.

During a final round of diplomacy on Monday, Iraq and Iran continued to express objections to the proposed deal, while OPEC members were also trying to bring non-OPEC member Russia into the fold, which has reservations about cutting its own supply given its depressed economy.  Russian President Vladimir Putin reportedly spoke to Iranian President Hassan Rouhani, where both highlighted “the importance of OPEC’s efforts to cap production as a key measure to stabilize global oil markets,” according to the Australian Financial Review.

Last week, Saudi Arabia pulled out of a meeting with non-OPEC members including Russia, saying that OPEC needed to sort out its own internal divisions before engaging with other producers. That preceded comments by Saudi energy minister Khalid al-Faith over the weekend, who said oil markets would rebalance without an output-limiting agreement.

Some oil analysts, including Morgan Stanley and Macquarie, have suggested prices could collapse if OPEC fails to reach a deal, potentially going lower than $35 per barrel.  Prices are currently hovering just below $50 per barrel.

One wild card for the oil market long term is the policy decisions of U.S. President-elect Donald Trump.  Trump has said he will make it easier for U.S. producers to drill by removing regulations and opening up federal land for development.  He also says he supports the Keystone pipeline from Canada to the U.S., which was denied a permit for construction by the Obama administration last year.

Promises of a U.S. production boon could throw a monkey wrench into any OPEC decision about a production cut, as members will not want to lose market share to the U.S. while an increase in supply will likely depress prices even further.

An effort to reach a deal in April in Doha, Qatar fell apart when Iran refused to freeze production and Saudi Arabia refused to freeze unless all members went along with it.  Now that production has climbed, talks now refer to a decline in output rather than a freeze, with Saudi Arabia ironically pushing for the deepest possible cuts of about 2 percent of the world’s output.

Analysts said that the OPEC ministers may decide on a deal at the actual meeting in Vienna instead of beforehand, as all options are laid out before them and they are called upon to issue a final consensus before adjourning for the year.

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