As Opec officials are racing against time to iron out their internal differences and get non-Opec members on board to cement a deal to cut oil production, the foundations for an agreement are looking increasingly shaky. In September the group had agreed in principle to lower output to 32.5mn-33mn bpd, a cut of up to 1.2mn bpd from current levels.
Benchmark Brent crude plunged from more than $115 a barrel in June 2014 to less than $28 in January this year. Prices have since recovered to cross $50.
Mixed signals from ministers of the Organisation of Petroleum Exporting Countries, however, are causing fresh volatility ahead of the meeting in Vienna today to nail down the deal. On Sunday, Khalid al-Falih, the Saudi Oil Minister, for the first time floated the possibility of leaving Vienna without an agreement. He suggested Riyadh could live with Opec failing to agree its first cut in output in eight years, saying recovering demand would “stabilise” prices next year.
Iraq and Iran continue to express objections. Iraq has said it will cut output, but it is short of money needed to fight Islamic State extremists. Iran refused to join an Opec-Russia effort to freeze supply in April, prompting Saudi Arabia to scuttle the plan at the last minute. Whether it will participate in cuts this time around is one of the main obstacles to a deal.
Russia, the world’s largest energy producer which pumped at a post-Soviet record of 11.2mn bpd last month, has said it is ready to freeze output but not to cut.
The stakes are very high. Consistently lower oil prices have blown a massive hole in producers’ finances in recent years, hurting not just more vulnerable Opec members like Venezuela and Nigeria but even the Gulf countries. Saudi Arabia is projecting a budget deficit of $87bn in 2016.
Low prices have also hit new investments, raising the prospect of a future oil shock. The biggest international oil companies will probably cut investment spending by about $370bn this year and next, according to Wood MacKenzie.
Companies including Exxon Mobil Corp and Royal Dutch Shell have together added $490bn to their market value this year, the biggest gain in six years following a 27% rise in the Brent, according to Bloomberg data. This follows an $850bn loss last year and $720bn in 2014 as crude prices plunged. Without a deal, that gain is at risk.
In the event of an Opec failure, the International Energy Agency predicts that the oil market will remain in surplus for a fourth year in 2017, which could cause prices to fall.
While few analysts expect oil prices to return to the wishful $100 level, it all now boils down to Opec, which is leading the effort to prop up prices. Without a deal, prices could plunge to the low-$40s, warns Goldman Sachs.
For sure, it is a make-or-break chance for Opec; not only to boost oil prices, but to strengthen its standing in global oil market.