With the last day of OPEC pre-negotiations almost over, the latest from Vienna is that Iran and Iraq appear to have softened their positions ahead of a crucial OPEC meeting on Wednesday, however as the WSJ reports, “it may not be enough to satisfy Saudi Arabia’s demands for a broad-based oil-production cut.”
The two main wildcards remains Iran and Iraq, the latter of which has agreed to use independent estimates of its output at 4.55 million barrels a day, however Iraq has said it would only freeze from that level, not cut.
Iran meanwhile has said it would be willing to freeze its production in early 2017 at a level of 3.797mmbpd, to claw back the market share it lost during years of Western sanctions. The negotiations continue as part of a push to reach an agreement that cuts total output by 1.2 million barrels from October levels. The latest draft of the Vienna agreement would ask 10 OPEC members to make a 4.5% oil production cut, with Libya and Nigeria exempted because they are increasing output after civil unrest disrupted their oil industries.
Earlier in the day, the Ecuador Foreign Minister said that OPEC still disagrees on individual production quotas.
The discussions continue amid a skeptical climate of as OPEC members have expressed pessimism ahead of the gathering. As reported earlier today, Indonesia’s oil minister Ignasius Jonan said his country hadn’t decided yet whether to join production cuts. Asked if Iraq and Iran remained obstacles to a deal, he made a face and declined to comment. “It’s a mixed feeling,” he said of his expectations for Wednesday’s meeting of 14 oil ministers.
Making matters worse is confusion about the role, willingness and ability of Saudi Arabia to engage in fruitful discussions. Citing one OPEC source, the WSJ notes that “there seems to be a disconnect among the Saudis,” the OPEC official said. “Their guys in Vienna have no mandate to negotiate anything.” However, another OPEC official disagreed and said the Saudis in Vienna were fully empowered. “The Saudi policy is consistent,” this official said. In an amusing interlude, Saudi Arabia oil minister Khalid al Falih is said to have entered through a hotel side door, to avoid speaking to the press. His reluctance to speak is understandable: if Iraq and Iran do not change their mind, Saudi Arabia may be stuck footing nearly all of the expected 1.2mmbpd cut, taking its production as low as 9.5 million barrels daily.
According to Reuters, the negotiations are set to continue tomorrow with OPEC ministers scheduled to meet informally at 7am on Wednesday before the formal talks begin. Additionally, the formal talks have been pushed back by an hour to start 10:00 GMT, providing the last minute discussions some additional space.
So where does that leave us? According to the latest Bloomberg matrix, there are three possible scenarios ahead of tomorrow:
- Fudged deal: Output cuts with exemptions for Iran, Iraq, possibly without any clear production targets for those cutting.
- Full agreement: Clear quotas and no exemptions beyond those already granted to Nigeria and Libya. Deal would probably boost prices to >$50/bbl with market switching focus to compliance with individual targets
- No deal: OPEC fails to agree any kind of deal, probably triggering price crash to $40 or below.
All of the above remains highly fluid, and changes with every incremental headline.