One day after Saudi Arabia raised the prospect that Wednesday's OPEC summit in Vienna may conclude without a deal (which also was spun as optimistic as the market would still revert to "equilibrium", however it was unclear at what price), OPEC members tried on Monday to rescue a deal to limit oil output as tensions grew among the producer group and non-OPEC member Russia.
OPEC experts started a meeting in Vienna at 0900 GMT (4:00 a.m. ET) and were due to make recommendations to their ministers on how exactly the Organization of the Petroleum Exporting Countries should reduce production when it meets on Nov. 30. At the same time, the Algerian and Venezuelan oil ministers flew to Moscow on Monday and Tuesday in a final attempt to persuade Russia to take part in cuts instead of merely freezing output, which has reached new highs in the past year.
In September, OPEC, which accounts for a third of global oil production, agreed to cap output at around 32.5-33.0 million barrels per day versus the current 33.64 million bpd to prop up oil prices, which have more than halved since mid-2014. The meeting on Nov. 30 was expected to rubber-stamp that deal, with Russia and some other non-OPEC producers such as Azerbaijan and Kazakhstan also contributing.
However, two months later, "doubts emerged in recent weeks" as OPEC's No.2 and 3 producers, Iraq and Iran, expressed reservations about the mechanics of output reductions and Saudi Arabia voiced concern about Russia's willingness to cut Reuters muses. On Friday, OPEC canceled an experts meeting with non-OPEC producers scheduled for Nov. 28 after Saudi Arabia said the organization needed to sort out its differences first, sending oil tumbling by over 3%.
Adding to concerns, on Sunday, Saudi Energy Minister Khalid al-Falih said oil markets would rebalance even without an output-limiting pact. That contrasted with his previous statements, in which he had said Riyadh was keen for a deal.
“The market will reach balance in 2017 even if there is no intervention by Opec,” said Khalid Al Falih, Saudi Arabia’s energy minister, on Sunday. “I think maintaining production at current levels is justifiable.”
Indeed it is, but at far lower prices. Should there be no deal, analysts - including Morgan Stanley and Macquarie - have said oil prices will correct sharply if OPEC fails to reach a deal, potentially going as low as $35 per barrel. “One thing few, if any, analysts will disagree with is that if Opec does not come up with a credible agreement to cut production on Wednesday oil prices will end the year below $40 and be chasing down $30 early next year,” said David Hufton of PVM, a London-based oil brokerage, quoted by the FT.
We previously showed a matrix from BofA laying out the various prices/probabilities of an outcome, although in retrospect, the bank may have been a tad optimistic with its base case.
As OPEC experts turned up at the group's headquarters on Monday, one delegate quoted by Reuters, who had previously stated that a deal would be done, said this time: "I am not sure."
Another delegate, when asked about the prospects for a deal, said: "Nobody knows yet".
OPEC ministers started arriving in Vienna on Sunday for the group's regular twice-yearly talks but Saudi Arabia's Falih was not expected to land before Tuesday evening, leaving little time for traditional pre-meeting discussions with peers. As we first reported yesterday, Iranian semi-official news agency MEHR published an editorial on Sunday accusing Saudi Arabia of declaring a new "war on oil prices" and reneging on its promises to limit output. The tone contrasted with Iranian news agencies' more upbeat coverage of OPEC's informal meeting in September in Algeria, when the initial deal was reached.
Meanwhile, according to a report in the FT, the latest deal parameters - while largely unchanged from what was reported previously - are as follows:
Saudi Arabia, the group’s de facto leader, has offered to cut 4.5 per cent from its production levels of about 10.5m b/d in October, according to two people familiar with its thinking.
But in turn, Iran must freeze its production at about 3.8m b/d, while all members must accept the use of third-party production figures published by Opec, the people said. On top of that there must also be participation from producers outside the group, such as Russia.
Iran, however, argues only those countries that have ramped up production over the past two years — Saudi Arabia and its Gulf allies — should cut back now.
Even if Opec came to an agreement, Saudi Arabia has told members that any cut in production must be conditional on participation from producers outside the group, such as Russia, the people familiar with Saudi policy-making said.
Moscow has offered to freeze its output if Opec reached a deal.
In summary: every oil producer wants some deal that will send prices higher, but nobody wants to be the one to concede to cuts, validating Saudi's near record output, and lose market share in the process. That said, with sentiment weighing on oil prices this morning, expect a spike in "optimistic" sounding flashing red headlines, which will likely prompt another short squeeze and lead to a green close in crude. What is decided on Wednesday, however, is another matter entirely.