The oil market has seen its share of volatility over the past several weeks, as uncertainty continues over the looming OPEC meeting on November 30. The meeting, set to take place in Vienna, is widely viewed as a critical step in reviving flagging oil prices and reassuring wavering traders. In the face of lingering questions regarding excessive oil production and continued in-fighting among the members of the Organization of the Petroleum Exporting Countries, each new development in the lead-up to the meeting has brought about a sharp response from the market.
A Problem of Supply
After sustaining prices at or above $100 per barrel for much of the first half of 2014, oil prices crashed in the closing months of the year and have since struggled to recover. Though the struggling market can be traced to a number of factors, the primary cause has been a significant surplus in worldwide oil production. OPEC members set in motion a plan to address the global oil surplus during a September meeting in Algiers, where the member nations reached a preliminary accord to ease oil production to between 32.5 and 33 million barrels per day. In order to reach the target range, the cartel would need to decrease daily production by a combined 600,000 to 1.1 million barrels.
While the conservative 600,000 barrel figure would certainly elicit a response from the market, analysts have suggested cuts in the range of 900,000 barrels per day as a more productive target. Some member nations, including Saudi Arabia, have reportedly pushed for a more aggressive reduction of about 1.1 million barrels per day to spur rising prices and ease pressing budget concerns. To further move the market, Russia and other non-OPEC countries have also been encouraged to slash production by as much as 500,000 to 600,000 barrels. If an accord could be reached on such aggressive measures, the result could be a decrease in daily global production of as much as 1.6 percent.
Questions Remain
Though an agreement is viewed as the most likely result of the November meeting, the outcome is far from certain. The need for reduced production is obvious to all involved, but questions still remain regarding how a potential deal should be structured and which countries should shoulder the greatest burden. Saudi Arabia, the cartel’s most powerful and influential member, has repeatedly announced its willingness to slash production – so long as other members follow suit.
In particular, the kingdom has reportedly expressed its desire for substantial production cuts in Iraq and a halt to Iran’s plans to continue boosting production. Though both countries have indicated at least some willingness to participate in a deal, Iraq continues to insist its oil production is a necessary component in the fight against ISIS, while Iran has been hesitant to reveal its plans ahead of the meeting. Further complicating matters, tensions continue to simmer between Saudi Arabia and non-member producers such as Russia and Nigeria, casting doubt on the potential for agreements with countries outside of the cartel as well as within.
The Post-Meeting Fallout
Failure to reach an equitable agreement could have swift and significant ramifications, with projections indicating that prices could sag to, or even below, $40 per barrel. With many of the world’s heaviest oil producers already facing budget crunches as a result of the struggling market, further losses could have serious effects for many months to come. Venezuela, in particular, has teetered on the verge of crisis for months due to massive budget shortfalls resulting from struggling oil prices. Algeria, too, has been navigating a precarious economic situation that would likely be exacerbated should the meeting fail to produce an adequate deal. In the worst-case scenario, the perception of the cartel as a united front could be threatened. While oil-dependent nations such as Nigeria, Venezuela and Iraq must rely on healthy markets to sustain their economies, more economically diverse members like Saudi Arabia could be viewed as manipulating a depressed market for their own ends rather than the goals of the cartel.
The ideal outcome, of course, remains an agreement to freeze or cut production across the board, with both cartel members and independent oil producing countries committing to take active steps to reduce the excess global supply. Such an agreement, analysts speculate, could lead to prices rebounding to a more sustainable $55 or even $60 per barrel, depending on the magnitude of the cuts. Rallying prices would ease economic concerns for many oil-producing nations, but they could also encourage producers in the United States and other nations to be more aggressive in pursuing fracking and other production sources, which could blunt some of the impact of OPEC production cuts. If talks were to fall through, one acceptable intermediate option may be for a compromise involving temporary production freezes until additional meetings could take place in early 2017.
Regardless, with the hours and days rapidly ticking down to the November 30 meeting in Vienna, all eyes are once again turned to the Organization of the Petroleum Exporting Countries. Each day seems to bring new reasons for optimism, but also additional evidence that many hurdles still must be cleared before a satisfactory deal can be made. In the meantime, the oil markets – and the economic and geopolitical fortunes of many of the countries and peoples involved – may hang in the balance.
