OPEC at the crossroads: the end of the oil negotiations in Vienna

When will be known the outcome of the meeting?

OPEC Ministers began informal consultations 10:00 GMT in the Vienna Park Hyatt in the format of a working Breakfast. “Now is the time for Breakfast,” said OPEC Secretary General Mohammed Barkindo reporters who asked for comment. The official start of negotiations was scheduled for 12:00 GMT. Based on the preliminary programme published by the Secretariat of the cartel earlier this week, the meeting could last at least five hours.

What’s the bet OPEC members?

In September, the cartel countries have agreed to limit collective production ceiling at 32.5–33 million barrels./day (compared to the current level of production at 33.6 million barrels./day). Major differences remain between Saudi Arabia, the informal leader of the group and author of the initiatives, and Iraq and Iran, key members, who increasingly are questioning the dominant role of Saudi Arabia.

Iran, in respect of which until recently operated the oil embargo, insists that the obligation to freeze or reduce production first took over his partners at the petroleum club, and the country will begin to discuss the parameters of the accession to the agreement not earlier than the production in the country will return to pre-sanctions level (4 million barrels./day). Iran insists that Saudi Arabia went to more production cuts, because in the last few years, the Kingdom has increased it by a greater amount. Iran would like to produce approximately 7.2% more oil (marginal production — 3,975 million barrels./day) than for Saudi Arabia (3,707 million barrels./day).

Iraq also is seeking special conditions, citing the fact that he bears a heavy burden in the fight against the terrorist group “Islamic state” (banned in Russia), which is opposed to the government forces within the country’s ongoing civil war. From participation in the transaction may due to the difficult economic situation, to withdraw, and Libya, published on the website of the Libyan National Oil statements by the Chairman of the company.

OPEC, among other things, asks countries not belonging to the organization, reduce total production by about 500-880 thousand Barr./day, said representatives from various countries, including energy Ministers of Russia and Azerbaijan.

How to behave on oil prices during a meeting?

Oil rebounded from two-week lows, after the Minister of oil of Iran Bijan Zanganeh said Wednesday that OPEC members will sign an agreement which provides neither a reduction nor freezing production for Iran. “This new scheme, nor for one country will not freeze. Forget the concept of freezing”, he said.

As of 14:20 Moscow time, Brent oil prices rose by 7.24%, to $49,77 per barrel, WTI — by 6.5%, to $48,23 per barrel. Investors pay the maximum since February, the premium for insurance against fluctuations in oil prices (based on the volatility of futures options WTI) amid mixed data on whether OPEC members on Wednesday to agree on production cuts to support prices, says Bloomberg. Investors are making big bets on sharp price spikes both up and down, said the Agency John Kilduff, partner at energy hedge Fund Again Capital LLC in new York.

What is the probability of a particular outcome?

Most Bloomberg surveyed analysts predict that OPEC members will sign an agreement on production cuts, but only seven of the 20 expect to see specific limits on the production countries, which complicates the task of investors who are trying to assess the implications for the markets.

Bloomberg cites three possible scenarios of development of events according to the results of the Ministerial talks. In the first case, countries may agree on production cuts, but will make an exception for Iran and Iraq. There is a risk that such agreement will not be clearly marked targets for production for each of the countries. For balance of supply and demand, total OPEC production should not exceed 31.9 million bbl./a day in the first half of 2017, estimated earlier by the group. If the ceiling of production will record at a higher level, it will not help to cope with the projected oversupply of the commodity in the first half. This may cause uncertainty about the stable recovery of the market and lead to a sale tied to oil quotations of assets, says the Agency.

In the second case, the Ministers will agree on a clear country quota, not related to Nigeria and Libya, as it was agreed at a meeting in Algiers in late September. Such an outcome would cause investors to monitor compliance with the signed agreement, which can lead to an increase in oil prices above $50. If the OPEC countries and conclude an internal agreement, it will then be presented to other countries asking to join, said oil strategist Julian Lee. The organization can also come to an agreement for a period of six months indicated in the survey by Morgan Stanley dated 29 Nov.

In the third case, the talks will end inconclusively, without any agreement. Then prices could fall to $30-40, I think a Bloomberg survey of analysts. Such a scenario would undermine faith in the ability of OPEC to manage the market in the future. The probability of the latter increased after the statements of the Minister of oil of Iran Bijan Namdar Zanganeh. Tuesday upon arrival in Vienna, he said that the country is not ready to go on reduction.

While Saudi Arabia is ready to refuse the transaction if all OPEC members will not participate in it, said on Tuesday, 29 November, sources familiar with the current position of the Kingdom in the negotiations. However, on Wednesday in Vienna, the oil Minister Khalid al-falih told reporters that Saudi Arabia is configured “relatively optimistic” about the meeting. “We are closer to a deal, but has yet to agree a lot in the final terms, a fair allocation of production cuts by all countries,” he said. “I am optimistic about the possibility of concluding an agreement”, — said the Minister of oil of Iran Bijan Zanganeh. The Minister of oil of Iraq Jabbar al-Laibi, in turn, said that OPEC will establish a Committee to monitor production cuts in the next six months.

What is the position of Russia?

Russia is ready to more flexible positions to limit production, if OPEC reaches an internal agreement on the reduction of oil production, said Wednesday the Agency Bloomberg, a source familiar with the Russian position. In the case of the OPEC agreement to reduce production and distribution of quotas between the countries — members of the organization Russia is ready to participate in the deal with more flexible position than freezing, including by reducing production, the source said. Russia has expressed readiness to reduce oil production and to cooperate with OPEC after a conversation Iranian President Hassan Rouhani and his Russian counterpart Vladimir Putin, said in Vienna the Minister of oil Bijan Namdar Zanganeh. Russian energy Minister Alexander Novak go to a meeting in Vienna, but said that Russia is ready to discuss with OPEC coordination, if the cartel will agree among themselves to limit production, has transferred “RIA Novosti”.