Unless you’ve been too busy buying the Greenback like there’s no tomorrow, you should know that the Organization of the Petroleum Exporting Countries (OPEC) as well as other non-member oil producers are set to have a huddle tomorrow.
What’s the meeting all about?
Remember that two years ago, OPEC tried to limit global oil output by flooding the markets with even more supply, a strategy that should have pushed competitors with higher production costs out. Instead, higher-priced producers got more efficient while the lack of policing from OPEC encouraged other members to ramp up their production even more.
Fast forward to OPEC’s November 30 meeting in Vienna, Austria where the goal is getting OPEC members and non-members alike to agree on some sort of deal to help reduce the global oil glut that has shaved prices in half over the last two years. Some of the popular options include cutting production and/or implementing output ceilings that would reduce output of up to a million barrels a day.
Will negotiations start from scratch?
Not exactly. Recall that oil players already had a huddle in late September with the meeting ending with a deal to… draft an outline of the real deal. Since then, OPEC member oil ministers have been hustling hard to hammer out the details of a deal that’s expected to get signed this week.
Unfortunately, it seems like the major oil players are no closer to finding common ground than they were a few months ago.
Saudi Arabia, the world’s largest oil producer (tied with Russia) and OPEC’s de facto leader, is proposing to use third-party production figures published by OPEC as basis for any production cut deal. It also wants Iran and Iraq to take a larger share of output cuts, something that both countries have opposed.
It also doesn’t help that Iran wants to hit its pre-sanction levels before agreeing to any cut; Iraq is questioning OPEC’s production data, and other conflict-laden territories such as Libya and Nigeria are pushing to get exemptions.
Not all hope is lost though. Earlier today Russia has announced that Putin and Iran’s Rouhani have talked over the phone and agreed to “continue to coordinate their efforts on the world energy markets, including the dialogue on energy between Russia and OPEC.” Russia also recognized that “the importance of steps taken by OPEC to limit the production of commodities was emphasised as an essential element for stabilising world oil markets.” This comes after Saudi has cancelled a meeting with non-OPEC producers on Monday.
What are the possible scenarios?
The best case scenario would involve a production cut or output freeze deal with concrete plans, hard numbers, and specific timelines. Such an outcome would likely push oil prices sharply higher over the next couple of days.
Market players aren’t crossing their fingers, however. While members are expected to sign an accord to reduce output, it’s more likely that the deal will not include specifics. As in the last meeting in Algiers, participating countries could promise details at a later date. If this is the case, then we’ll likely see global oil prices rally and then eventually lose steam.
The worst case scenario would be if members don’t reach any deal at all. The prospect of extending the oil glut and period of lower oil prices would fuel (pun intended) uncertainty and inspire risk aversion across the board.
How about you? What do you think will happen at the end of this week’s OPEC formal meetings?
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