OPEC Seen Reaching Deal, Yet Without Targets to Make It Stick

EghtesadOnline: OPEC will complete an accord to cut production this month, while stopping short of setting the individual country limits needed to make the deal work, according to a Bloomberg survey.

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17 November 2016

The Organization of Petroleum Exporting Countries will finalize a pledge to reduce total output -- its first cut in eight years -- when the group meets on Nov. 30, according to 14 of 20 analysts polled this week. Yet only seven of the 20 said the group will specify how much each member should cut, an essential part of OPEC’s actions in the past, according to Bloomberg.

As a two-year slump in oil prices batters the finances of OPEC nations, observers from Bank of America Merrill Lynch to hedge fund trader Pierre Andurand are confident the group will act. Yet the oil market remains “pessimistic,” according to BP Plc, as key producers Iran and Iraq seek to revive output lost to years of conflict and sanctions, complicating OPEC’s efforts to allocate targets to its members.

“It looks like there will be a deal, but not the deal that’s really needed,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt.

OPEC members will try to resolve the differences at impromptu talks in Doha this week, and will hold discussions there with Russia, the biggest exporter outside the group, which has signaled it’s prepared to at least freeze production.

New Direction

Indeed, there are powerful incentives for ministers to agree their individual share of the collective range adopted in Algiers on Sept. 28, at 32.5 million to 33 million barrels a day. The range implies they’ll need to distribute cuts of between 600,000 and 1.1 million barrels a day, the group’s data show.

As the global oil surplus enters a fourth year, it’s time for OPEC to concede that its attempt to clear the glut by pressing rivals with low prices has been a “failed experiment” and try something different, according to Michael Tran, an analyst at RBC Capital Markets LLC.

Prices are languishing below $50 a barrel, less than most producers need to cover their domestic spending, which leaves even richer nations like Saudi Arabia in a “tight spot,” Francisco Blanch, head of commodity markets research at Bank of America, said in a Bloomberg television interview.

“OPEC wants a $50-$60 price and they want to basically accelerate the re-balancing by cutting production modestly,” said Gary Ross, executive chairman at PIRA Energy Group, which is now a part of S&P Global Platts. “They’re all trying to do what’s in their self-interest, which is trying to cooperate to go ahead and see that OPEC is successful.”

Repairing Rifts

Still, there are plenty of barriers. Bilateral meetings over the weekend failed to resolve the rifts, according to a delegate familiar with the discussions who asked not to be identified.

Saudi Arabia, the group’s biggest and most powerful member, is seeking full cooperation from both its OPEC counterparts and major producers outside the group, Energy Minister Khalid Al-Falih said in London on Oct. 19.

Yet from the outset of the deal, Iraq -- still recovering from decades of war and sanctions and now battling an Islamist insurgency -- refused to lower output and rejected OPEC’s estimates of its production as too low.

Iran, which is also restoring exports after three years of nuclear-related sanctions ended in January, aims to raise production to more than 4 million barrels a day from about 3.9 million, officials from the Oil Ministry and state-run oil company signaled last month.

Main Obstacle

Besides disputes over how to share the burden, the main obstacle to an OPEC cut may be the same one that originally drove its policy in 2014 to keep pumping: that boosting prices and ceding market share would only stimulate supplies from competitors, such as U.S. shale drillers, to fill the gap.

Shale oil, which can respond more quickly to prices than traditional crude projects, would “pour” into the market if the organization manages to lift prices, Fatih Birol, executive director of the International Energy Agency, said on Nov. 16.

The consequences of failing to reach a deal could mean another price slump toward $40 a barrel, Goldman Sachs Group Inc. and Societe Generale SA predict.

With no accord to hold them back, OPEC members may revert to the competition and price-cutting that sent prices spiraling two years ago, according to Daniel Yergin, vice-chairman of consultants IHS Inc. and author of Pulitzer Price-winning history of the oil industry, “The Prize.”

“If there isn’t an agreement, it’s back to battle for market share,” Yergin said.