Russia has decided not to attend the pivotal OPEC meeting tomorrow in Vienna.
Remember, that’s the meeting where the oil cartel’s deal to cap or cut oil production, and boost oil prices is supposed to be finalized.
But OPEC can’t do that alone. They need Russia, the largest non-OPEC oil producer in the world, for any deal to be effective.
So it’s not surprise that oil prices are down this morning, following Russia’s decision to stay away.
Now, there’s still hope. Russia is still involved in the negotiations, but only on its own turf – and after being burned several times before, the country is now waiting for OPEC to come to Moscow with a done deal.
And that’s where the real problem lies. You see, OPEC itself is riven by internal feuds and rivalries, and may not even be able to agree with itself.
In other words, it’s crunch time in Vienna – for the oil cartel and for oil prices…
The OPEC Deal is Meant to Fix What Saudi Arabia Broke
The Vienna meeting is to hammer out an agreement among the cartel members to hold their aggregate oil production to 32.5 million barrels a day, starting in January.
Now, the actual figure is likely to be closer to the 33.8 million barrels a day registered in October. That’s because there’s a growing difference between the “official” total each OPEC member reports and the actual amount they release into the global market.
In today’s international environment of surplus production and lower prices leading to reduced sale revenues, there’s no longer any advantage to leaving oil in the ground. As you’ve seen me say here before, any unilateral attempt to increase prices by cutting production merely results in losing market share to some other provider.
This brutal zero-sum contest is the net outcome of the Saudi attempt to protect market share. The bottle is now open, with no way to put the demon back in.
The difference between the official and real oil export numbers also covers up a particularly grating aspect of the OPEC plan under consideration, at least for most of the cartel’s membership…
Not All OPEC Members are Equal
While the move is widely touted as a production cut, that is not true for everyone in the cartel. Iran and Iraq are likely to be given a pass, allowing them to simply cap their production, while the remainder of OPEC must actually reduce production, exports, and revenues.
Now, as you’ve seen here in Oil & Energy Investor before, neither Iran nor Iraq are capable of much additional production. Field problems, infrastructure collapse, and a range of security and political problems on both sides of the border are going to limit upside whether OPEC agrees to a deal or not.
But with all OPEC countries reeling from budget deficits caused by reduced oil revenues, allowing Iran and Iraq to benefit while the rest of the cartel suffers is hardly going to go down easily.
Some of these producers – especially Venezuela, Nigeria, Libya, Algeria, and Ecuador – are approaching (or have long since passed) the line between acute crisis and full-blown internal disintegration.
In other words, whatever else may happen over the next two days, OPEC itself as a viable organization is at issue.
Recent statements from Baghdad and Tehran that the two governments will continue to work with OPEC on resolving the production impasse may have made global headlines (temporarily supporting crude prices).
But they mean nothing when it comes to the feud festering inside the cartel.
Neither Iran nor Iraq is going to negotiate unless the concessions to each remain. When it comes to Iran, there is also another wrinkle…
Russia Has Been Burned by OPEC in the Past
The election of Donald Trump has brought into view a possible U.S. renunciation of the nuclear accord with Iran, and the return of sanctions. That’s prompting Iran to get whatever it can now before it has to defend yet again an only newly won ability to sell oil openly on the global market.
Which brings us back to why Russia this morning pulled out of attending the OPEC meeting tomorrow in Vienna. Moscow usually has the largest observing delegation at regular OPEC sessions. Now, Russia is not a member of OPEC, has no vote in the proceedings, but clearly has an active interest in what transpires.
However, this time the Kremlin has pulled back.
After the embarrassment of agreeing to a production cap in advance of the April special meeting in Doha, Qatar, only to have the Saudis scuttle the agreement at the eleventh hour (over a demand that Iran, not present at the meeting, sign on), and then agreeing again at Algiers at the end of September only to have Iraq and Iran introduce their demands for exemption, this time Russia will have a more cautious approach.
The Kremlin is still in discussions with OPEC representatives, but on its own turf (in Moscow). And before it commits to anything, Russia is also going to make OPEC come up with a firm proposal accepted by the cartel’s membership.
After all, OPEC controls only 40% of the world’s oil production.
That provides a simple truth…
OPEC is Stuck Between Russian, Iran, and Iraq
An OPEC accord to limit production among its members means little if non-OPEC producers disagree. And Russia remains the largest oil producer outside the cartel.
There is also another factor at work when it comes to the Russian reaction. Sources in the Russian Energy Ministry (Minenergo) tell me that the preliminary numbers discussed between Minenergo and OPEC specialists on Sunday indicated that Moscow would need to cut its production by more than 2%.
A number that high is a deal breaker as far as the Kremlin is concerned. Especially with Iran and Iraq getting a pass, and OPEC only indirectly controlling the excess production of its other members.
Even OPEC leader Saudi Arabia has had to keep its distance, deciding not to participate in the Moscow meetings. Riyadh must be able to maintain its independent negotiating stance with Russia as a way to broker a broader settlement.
All of this leads to one overriding conclusion.
OPEC must come up with a workable position – tomorrow – that is acceptable both within the organization and to Russia. There are no more excuses, no further opportunities to deflect the responsibility.
It’s crunch time in Vienna.
The future of OPEC, as well as the direction of oil prices, are at stake.
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