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Members of the Organization of the Petroleum Exporting Countries have failed to come to any sort of agreement to freeze or cut supply for over a year. Saudi Arabia’s focus on taking back market share from the US shale industry and the return of Iran and Iraq to the market after long absences have ensured that.
However, there were signs in recent months that OPEC members could reach an agreement to cut supply to a market that’s been awash with oil for three years. Most are suffering budget pressures due to the prolonged period of low prices. In September, OPEC appeared to come to an unofficial agreement to make a first output cut in eight years. It just needed to sort out the details, including the quotas of individual members, before ratifying the deal at this week’s formal meeting. Non-OPEC oil producer Russia seemed to be open to joining in, or at least to freezing its own production.
But any long-time OPEC watcher will be unsurprised a potential deal seems to be unravelling again. As oil ministers start to head to Vienna for the meeting, Saudi Arabia’s oil minister Khalid Al-Falih has already raised the prospect a deal won’t be struck, or that it’ll be a supply freeze rather than a cut. OPEC’s largest producer had pulled out of a meeting on Friday with the non-member producers including Russia, saying there was no point as OPEC itself could agree internally.
This could be an attempt by Saudi Arabia to push Iran and Iraq into agreeing a deal. Those two countries are still insisting they are excluded from any supply cut quotas given they are still in the final stages of getting back to somewhere near full pumping capacity. Libya too insists that its economy is too fragile to take any cuts. OPEC officials say talks are at least continuing, and so a deal isn’t off the table completely just yet.
But it could be Saudi Arabia has flipped again and truly doesn’t believe a supply cut is necessary. The International Energy Agency may have warned the global oil market will remain in surplus for a fourth year in 2017 without a supply cut, but Al-Falih now says he thinks the market will re-balance in 2017 without a supply cut because of rising demand.
The oil price is down again as jitters rise, and oil stocks are also falling with BP and Royal Dutch Shell both among the worst performers in the FTSE 100. We’re in for a period of price volatility. The chart below shows how September’s informal agreement initially lifted the oil price, but growing scepticism that a deal could be reached and whether it would anyway be enough to rebalance the world oil market soon took the heat out of the price.