After two months of trying to convince its OPEC peers to get on board with a production cut, it could end up being Saudi Arabia that walks away from a deal, sending oil prices tumbling back down to the low $40s or worse.
Saudi Arabia led the charge on the Algiers agreement in September,
Sensing Saudi Arabia’s desperation, Iraq and Iran
With OPEC’s second and third largest members unwilling to make any real concessions to date, it is difficult to imagine any result from Vienna will be a game-changer for the oil markets. Other members such as Nigeria and Libya are not going to be subjected to any cuts. The remaining members outside of a few Gulf States were never going to be able to make any serious reductions either. Without Iraq and Iran, Saudi Arabia will have to do all the work –
The lesson from the 1980s for the Saudis is that cutting unilaterally may not rescue oil prices, and it could even offer an opportunity for rival producers to steal market share. They have kept that lesson in mind over the past two years, and if Iraq and Iran decline to participate, it is unclear if Saudi Arabia is ready to go it alone. “If they are going to cut their production, the Saudis don’t want others to replace them,” an unnamed OPEC official told
As a result, Saudi Arabia has tried to draw a line in the sand just a few days before the highly anticipated meeting in Vienna. OPEC’s top oil producer has suggested that it is prepared to walk away from a deal unless other members step up to the plate, the logic being that the resulting oil price meltdown will be more painful for Iraq and Iran than it would be for Saudi Arabia. Saudi officials
By Sunday, Saudi Arabia’s oil minister Khalid al-Falih said that the oil markets will reach a balance in 2017 even if OPEC did not cut output, a remarkable statement that seems to be an attempt to lay the rhetorical groundwork to limit the fallout from a failed meeting this week.
"We expect the level of demand to be encouraging in 2017, and the market will reach balance in 2017 even if there is no intervention by OPEC. But OPEC intervention aims to expedite this balance and the market recovery at a faster pace," al-Falih
Al-Falih might not be confident that OPEC members will reach a deal, so he is downplaying the significance of the meeting altogether. Or, viewed another way, he is stepping up the pressure on Iraq and Iran to play ball by conveying a sense of indifference if the deal falls apart.
We will probably have to wait until later this week to see whether or not Iraq and Iran will give in or will call Saudi Arabia’s bluff.
By Nick Cunningham, Oilprice.com
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