Neither barrel is less: does the contract OPEC to reduce output

Back to $30

At a meeting in Vienna on Wednesday, November 30, members of the Organization of countries—exporters of oil (OPEC) will try to negotiate the final terms of the first eight years of collective production cuts. Since September, when the cartel, in principle, endorsed the initiative, countries were trying to divide between themselves the burden of this reduction, but still are unable to come to consensus. Then, the group has decided to reduce production by at least 600 thousand barrels a day, up to 32.5–33 million barrels. (in September and November, daily production amounted to 33.6 million barrel. for own estimates of OPEC in October and 33.7 million).

Brent prices, have risen since January by nearly 25% on the background of the negotiations the key players on the freezing of production, again at risk of collapse if no deal. In such a scenario it may test the $30 (last recorded in January), with increased production from OPEC and Russia in the fight for market share, predict analysts surveyed by Bloomberg. If consensus is reached, oil will be able to consolidate at current price levels or to grow, says the Agency.

By 16:40 GMT amid investor skepticism in regards to the deal of the January WTI futures in new York fell by 1.45% to $45,63 per barrel, while January contracts for Brent in London has fallen in price on 1,36%, to $46,88.

The split persists

The OPEC delegates failed to overcome disagreements about the conditions of production cuts at a meeting held on Monday, November 28, the expert meeting. The debate lasted ten hours. Iraq and Iran remained objections to the proposed initiatives, reported Bloomberg one of the delegates of OPEC. The plan calls for production cuts of 1.2 million barrels. per day compared with October levels (33.7 million barrels). Oil producers who have increased production in recent years, while Iran was under sanctions, “will have to assume a greater share of the production cuts,” said Tuesday, November 29, Minister of oil of Iran Bijan Zanganeh on state television before his departure to Vienna. Iran still would like to produce approximately 7.2% more oil (marginal production — 3,975 million barrels. per day) than for Saudi Arabia (3,707 million barrels. a day). During the meeting, the emissaries of the OPEC countries fought for each barrel.

“The parameters of the Algiers agreement [to cut production] was not clear initially, and OPEC tried to the last to delay their production”, explains Bloomberg the situation Abdulrahman al-Awadhi, an analyst from London in the past — the OPEC delegate from Kuwait. Two months after the original agreements, “the leaders of OPEC are in turmoil and are unable to overcome their differences, while seeking to involve in the transaction not included in the group of countries is a difficult task,” says al Awadi.

Trying to remove the differences between Saudi Arabia, Iran and Iraq, OPEC expects assistance not included in the group of large producers — especially Russia. Petroleum club encourages these countries to cut production by 600 thousand barrels. a day. Russia has so far opposed this, proposing instead to freeze their production at current levels. Except Russia, none of the countries outside OPEC, the results organized by the cartel in late October, discussions began to take on commitments to reduce or freeze production. In the meeting took part the representatives of Azerbaijan, Brazil, Kazakhstan, Mexico and Oman. To discuss limiting production from OPEC refused and Norway.

The Minister of energy of Saudi Arabia, the informal leader of the cartel, Khalid al-falih Sunday, November 27, also admitted that OPEC can’t agree production cuts. “We expect a recovery in demand in 2017, then the price stabiliziruemost, and it will happen without the intervention of OPEC, said al-falih in Dhahran, Bloomberg cites excerpts from Saudi newspaper Asharq al-Awsat. — We have only given path, such as production cuts at the OPEC meeting, we could rely on a recovery in demand, particularly from the United States.” Saudi Arabia refused to participate in scheduled for Monday, November 28, consultations with non-OPEC countries, including Russia. “There is no reason to participate in the meeting with non-OPEC producers to negotiations and a decision on whether to cut production or maintain current levels,” concluded al-falih.

At the last minute

Instead, the organization shall convene another internal meeting, to negotiations on 30 November to try to resolve the dispute — in particular, the question of whether Iraq is ready to cut production and Iran to freeze, told Bloomberg a delegate. Otherwise, Saudi Arabia will refuse the transaction. The Minister of energy of Algeria Noureddine Boutarfa, one of the architects of the September OPEC agreement on the limitation of production, on Saturday at a meeting in Tehran with Minister of oil of Iran Bijan Zanganeh has offered to cut production by 1.1 million barrels. a day. According to Batarfi, at the failure of the transaction prices could fall below $40 per barrel, passed the state news Agency Algerie Presse Service (APS).

Earlier, Iran insisted that it would be ready to discuss the parameters of the deal only after mining in the country will return to pre-sanctions levels of 4 million barrels. a day. The Prime Minister of Iraq Haider al-Abadi, in turn, sought for the country’s special conditions, on the grounds that it is fighting ISIS (banned in Russia organization) and therefore should not join the transaction. First, Iraq was opposed to production cuts, but then said that he would take on such obligations. From participation in the transaction may withdraw from Libya because of the difficult economic situation in the country, should be published on the website of the Libyan National Oil statements by the Chairman of the company.

Bouterfa and his colleague from Venezuela, Eulochio del Pino, on Tuesday, 29 November, to take part in the talks in Moscow, said a source knowledgeable about the discussions. Bouterfa will also meet with colleagues from Iraq, Saudi Arabia and Qatar in Vienna ahead of the OPEC Ministerial meeting, reported APS. Before the meeting in Vienna is only a day, and the cancellation of even one member of the cartel will put an end to the September agreement on production cuts, according to Bloomberg.

“Saudi Arabia and Iran use a very effective negotiating strategy, explained Bloomberg Abhishek Deshpande, senior energy analyst at the London unit of the French Bank Natixis. — The problem of the Saudis is that they can no longer as in the 1980-1990s to demonstrate the power, to make others obey their will.” Today other members of the group such as Iran and Iraq, not inferior to them in power, and they seek to increase their market share, concluded Deshpande. On Saturday, November 26, the Minister of energy of Russia Alexander Novak said that “OPEC needs to reach a consensus within the organization before an agreement will be able to join the countries outside of OPEC.”

The effect of the transaction

A compelling statement of significant OPEC production cuts, especially to the level of 32.5 million barrels. a day, can spur the growth of prices of $5 or higher in the following days, Bloomberg cites excerpts from the review of Morgan Stanley analysts led by Adam Longson from November 28. The effect will be even stronger if supported by strong statements from countries outside OPEC, while the attention and focus on the risks to implementation and sustainability of the transaction, and in response increasing production outside OPEC (especially North America).

Oil companies around the world hope that the Organization of countries-exporters of oil will trigger a market rally that will allow them to raise funds to increase drilling. Petroleum club wants to create a “perfect” zone between $50 and $60, which is “high enough for the revenue growth affected producers, but not too high to trigger a new wave of increased production of shale oil in the United States,” says Bloomberg Walid Khadduri, a specialist in OPEC from the Institute of the Arab countries of the Persian Gulf in Washington.

If OPEC transactions will not, in 2017, as the three previous years, the proposal will outrun demand, which may cause decrease in quotations. But even if it is concluded, “it is doubtful that the members will adhere to the terms of the agreement and will continue, as before, to increase production,” said the Agency Behold the sun-Yoon, an analyst at Seoul brokerage Kiwoom Securities.

With the participation of Lyudmila Podobedova