Gary Lamphier: OPEC talks to curb oil output come down to the wire


Oil prices ended the week on a sour note, as investors brace for a critical meeting Wednesday of the Organization of Petroleum Exporting Countries in Vienna, Austria.

West Texas Intermediate, the benchmark grade of U.S. light crude, fell more than $2 US, or 4.2 per cent, to close at $45.93 US a barrel Friday on the New York Mercantile Exchange. Brent crude, the key international grade, also swooned. It fell $1.92 Friday to end the week at $47.08 US a barrel on London’s ICE Futures Exchange.

Members of the oil cartel, which accounts for about 35 per cent of global supplies, have been immersed in increasingly desperate talks in recent weeks in an effort to make good on a September pledge to curb output by roughly one million barrels per day.

With oil prices still languishing nearly 60 per cent below their mid-2014 high of over $100 a barrel, OPEC’s 14 member states are under growing pressure to stop the bleeding. Some OPEC members — notably Venezuela — are in the midst of a full-blown economic crisis, while others, including Saudi Arabia, face bulging deficits.

If successful, the proposed OPEC deal would trim output to between 32.5 million and 33 million barrels per day, down from an estimated 33.6 million in October. But this week’s developments suggest there’s still a long way to go before any truce is negotiated. With the clock ticking down to Wednesday’s meeting, time is running short.

Although Saudi Arabia is reportedly willing to scale back its production, other members of the cartel — notably Iran, Iraq and Libya — are believed to be resisting. Iran, hampered by trade sanctions until early this year, is on track to boost output back to at least four million barrel per day.

Iraq is pumping as much oil as it can to generate the cash needed to pay for its ongoing war against ISIS. Libya is also set to drive output back up by early 2017.

While many analysts expect OPEC to reach an accord this week, Maison Placements Canada energy analyst Josef Schachter remains skeptical that any deal, even if it can be enforced, will matter much.

“The rhetoric by OPEC that they will complete a deal by the end of November to cut back production from the October level has kept crude prices elevated. Saudi Arabia and the OPEC members not able to increase production are the proponents of the deal, and are hoping that Russia will freeze its production so that an OPEC deal might have a chance to stabilize or even raise the price of crude to over $70 in 2017,” he wrote in a report issued this week.

“The numbers, however, don’t add up. The OPEC-four (Iran, Iraq, Libya and Nigeria) are not going to participate in production cuts, but rather are all planning on material production increases in coming months,” he warned.

Schachter’s prediction: the global crude oil surplus is likely to swell to some two million barrels per day in coming months and that’s likely to send crude prices into another deep swoon by the first quarter of 2017.

Some other pros share Schachter’s skepticism.

“Saudi Arabia could cut its production by approximately 500,000 bpd, which would merely mean reducing output to the normal winter level,” analysts at Commerzbank Securities told clients in a note, Dow Jones MarketWatch reports. “The remainder would have to come from other countries. However, apart from Saudi Arabia’s allied Gulf neighbours, no other country is currently showing any willingness to cut production.”

Russia, which isn’t a member of OPEC but ranks as the world’s top oil producer, continues to send conflicting signals about its willingness to play along with any plan to slash output.

“There’s no way the cartel should even think non-OPEC players will cut production,” says Schachter, who was interviewed Friday by the Journal. “OPEC is the swing producer because they don’t consume most of the oil in their home countries. So any logic that says they should get non-OPEC to play ball is totally screwy. The U.S. won’t cut back, the U.K., Norway, Canada, Colombia and Brazil won’t cut back. Saudi Arabia has to be the one to take the pain. If they’re not prepared to take the pain, there’s no deal.”

The signs don’t look promising. Saudi Arabia cancelled proposed talks Monday with Russia and other non-OPEC nations, as the sides continue to bicker over how to divvy up any cuts, Bloomberg reports. Saudi Arabia is said to want an OPEC deal in place before holding any talks with non-cartel producers.

“The whole Algerian deal (announced in September) wasn’t clear from the beginning and their approach was ‘leave it to later’,” Abdulsamad al-Awadhi, a former OPEC official who now works as an independent oil analyst in London, told Bloomberg. “OPEC leaders are confused and the group’s founding members can’t solve differences, but they want to have a deal with non-OPEC. This a tough call.”

Technical experts from OPEC member countries met in Vienna this week to map out the cuts and will meet again Monday in an effort to resolve their differences, sources said.

For his part, Kevin Birn, a director at IHS Energy in Calgary, remains upbeat that OPEC will reach some kind of deal over supply cuts, despite the protracted wrangling.

“I think there’s a lot of pressure to have some sort of deal, whether that is actually an agreement to have another agreement or is actually a substantive agreement on the shares each player will have,” he says. “If they don’t have a deal that will be a hugely bearish signal on oil prices, and they don’t want that, so at the very least they’ll want to continue the conversation to support prices at least where they are.”

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