Confirming the swirling rumors from Friday, WTI crude is leaking lower (near $47 handle) in early asia trading afer Bloomberg reports OPEC's internal disagreements over how to implement oil-supply cuts agreed to last month prevented a deal to secure the cooperation of other major suppliers.
More than 18 hours of talks over two days in Vienna yielded little more than a promise that the world’s largest oil producers would keep on talking. Discussions will continue in late November, just days before the Organization of Petroleum Exporting Countries is supposed to finalize the accord that lifted oil prices to one-year highs.
Non-OPEC nations ended talks with the group on Saturday without making any supply commitments, Brazil’s Oil and Gas Secretary Marcio Felix said after the meeting. Brazil won’t restrict its oil production, though it’s willing as early as next year to host future OPEC conferences with the world’s biggest producers, he said in a phone interview.
A deal wasn’t possible because internal OPEC talks on Friday reached an impasse over the role of Iran and Iraq, both of which want to be exempt from any cuts. While non-member Oman said Saturday it was willing to cooperate in a supply deal, it couldn’t commit to a specific output cut until OPEC had its own agreement.
And WTI is extending Friday's losses…
As OilPrice.com's Julianne Geiger noted, in a tweet late in the afternoon on Friday, the Wall Street Journal’s financial reporter, Georgi Kantchev, said that OPEC’s technical meeting in Vienna was in deadlock, with Iraq and Iran disputing data on the grounds that OPEC has underestimated their production.
A separate tweet moments later stated that Iraq and Iran “refuse” to freeze their output, according to WSJ sources.
The news that Iraq and Iran may be refusing to freeze may disappoint the markets, but it is not shocking, and follows a pattern we’ve seen unfolding for quite some time.
Most recently, Iraq insisted on Sunday that it should be exempt from any OPEC cuts that were being discussed on the grounds that it needed to maintain production while it continued its fight against Islamic State. At the time, Iraq had scared the markets, not by refusing to take part in OPEC cuts that are said to be finalized on November 30, but by mentioning that it should be producing some 9 million barrels per day were it not for the war, pointing out that other countries had taken a chunk of its previously held market share.
But before that, Iraq and Iran had decided not to send their oil ministers to the OPEC meeting in Istanbul the week of October 10, in a sign that not all OPEC members were on board weeks ago.
But Iraq showed its displeasure at the deal all the way back in late September, when it began to question the method in which OPEC calculated production figures—production figures that would be used to determine who would cut what.
Meanwhile, OPEC long ago implied that Iran would receive some type of pass, with Saudi Energy Minister Khalid al-Falih saying back in late September that Iran, Nigeria, and Libya would be allowed to produce “at maximum levels that make sense”—whatever that means.
So if what the WSJ sources are saying is true, and Iraq and Iran are indeed flat-out refusing to freeze their output, this changes nothing other than to offer up some level of certainty to the market. The OPEC deal was on shaky ground from the beginning, and today, it remains on more solid ground that the deal will likely be a no-go.
Although some had hoped that Iraq would join in, the likelihood that they would give up even more market share than what it already lost was always quite slim.
This leaves Saudi Arabia, OPEC’s #1 producer, and the United Arab Emirates, OPEC’s #4 producer, holding most of the bag. If OPEC is still committed to cut between 200,000 and 700,000 bpd—and if OPEC grants Iraq—OPEC’s #2—and Iraq—OPEC’s #3—a pass, then Saudi Arabia and UAE should get ready to hunker down and take the brunt of the cuts, or resign themselves to the fact that a cut just isn’t feasible, with two of OPEC’s top four producers are not ready to take part.
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So what happens next?
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