Organisation of oil exporters decides against reducing production level despite calls by some members for higher prices.
When the Organisation of the Petroleum Exporting Countries (OPEC) and other major oil producers conclude their meeting on Sunday, analysts hope that an agreement to freeze output will reassure global energy markets that the recent recovery in prices is sustainable.
The group’s ability to deliver a deal, however, has been cast into doubt by infighting and conflicting statements in the run-up to Sunday’s gathering in Doha, Qatar.
Uncertainty over the outcome has also added to market volatility, with some analysts sceptical that even if a freeze is agreed upon, it will have much impact on prices in the short-term.
“A decision to freeze production may not trigger an immediate upsurge in oil prices, [but] risks are on the upside as overcapacity would gradually start to normalise over the coming months,” Apostolos Bantis, a credit analyst at Commerzbank, told Al Jazeera.
Last week, Kuwait’s OPEC governor, Nawal al-Fuzaia, suggested in widely reported comments that the meeting would reach an initial agreement on freezing output.
Fuzaia’s comments stand in contrast to remarks to Bloomberg by Saudi Arabia’s deputy crown prince, Mohammed bin Salman, that the kingdom would only lock production if Iran similarly agreed.
This week, Saudi Arabia’s long-serving oil minister, Ali al-Naimi, also downplayed speculation over Sunday’s meeting.
Saudi Arabia is OPEC’s most powerful member, but according to Alejandro Barbajosa, the vice president of crude and LPG for the Middle East and Asia-Pacific region at Argus, Iran is not about to compromise with its regional rival.
“Iran is by no means ready to agree to a production freeze just as it aims to recover lost market share because of recently lifted sanctions,” Barbajosa said.
“The sooner Iran is comfortable having attained its target production levels, the sooner it can cooperate with Saudi Arabia, Iraq and other OPEC members to make a significant output cut.”
Others are even less convinced that an agreement will be reached. “I personally believe they won’t agree, and prices will fall just below $40.
In case they agree, the price will go up, but not by much – maybe $2 to $3 maximum, since it is already priced in,” said Jaap Kalkman, managing partner of Arthur D Little’s global energy and utilities practice.
Prices for Brent Crude have rallied more than 60 percent amid anticipation that the market has found a floor after hitting 13-year lows in January and a greater-than-forecast fall in US stocks, but prices fell immediately after the deputy crown prince’s comments.
In a weekly report earlier this month, the US Energy Information Administration said that US crude stocks increased by 6.6 million barrels from the previous week to 536.5 million barrels and cautioned that “US crude oil inventories are at historically high levels for this time of year”.
With markets still weighed down by supply, a failure by OPEC to reach a consensus in Doha could prompt a further rout in prices, as hedge funds take advantage of the group’s lack of unity.
The prospect of turmoil in oil markets prompted the multinational bank, Standard Chartered, to warn in a research note in January that speculative interest could drive prices as low as $10 a barrel before the market capitulated.
While this seems a remote possibility, it illustrates that forces other than straight supply and demand factors could drive prices significantly beyond fundamental valuations.
The precipitous fall in oil prices has ravaged OPEC member economies, notably those in the Gulf Cooperation Council (GCC), who face an epoch of shrinking reserves, ballooning deficits and lower growth. This year, the International Monetary Fund (IMF) forecasted that the Gulf’s bellwether economy, Saudi Arabia, would grow by just 1.2 percent.
Almost without exception, the GCC states are resorting to borrowing to finance deficits in a bid to shore up finances.
Veteran Saudi journalist Khaled al-Maeena says that change foisted on the GCC must translate into actions.
“[It is a] huge impact on GCC economies,” Maeena said.
“Some like KSA have to focus more on diversification. You can’t diversify using age-old methods; we need to have a liberal economy [and] a liberal political framework.”
Sunday’s Doha meeting should focus on cooperation among producers to stabilise prices, Maeena added.
Meanwhile, the outcome of the meeting on Sunday will be crucial not only to the integrity of OPEC, but also to the global economy.
The fall in oil prices has seen one of the greatest flows of wealth from the oil-exporting countries to oil-importing nations.
“The massive drop in oil prices from $115 in mid-2014 to $30, if sustained, will push back $3 trillion a year from oil producers to global consumers, setting the stage for one of the largest transfers of wealth in human history,” said Francisco Blanch of Bank of America Merrill Lynch.
However, that has not translated into wholesale growth with the IMF warning in its April 2016 World Economic Outlook of “an increase in the already significant downside risks” to the global economy.
Sunday’s meeting is more than just a “will they or won’t they” scenario: It is also about the extent to which oil producers are prepared to sacrifice national interests for a return to market stability.
When it comes to one of the world’s most valuable commodities, intrinsic politics suggest there may yet be more surprises to come.