Crude prices could skid further after OPEC talks
Just four years ago, on Thanksgiving Day in 2014, OPEC held a meeting in Vienna, the outcome of which set off a dramatic slide in oil prices. The price of Brent crude dropped $6 a barrel, or 8 percent, in just the 24 hours after OPEC announced the outcome of its meeting. This Thanksgiving, there was no OPEC gathering, but on Friday, the Brent price still slid nearly $4, or 6 percent, to its lowest mark in a year. Although the price has stabilized, we cannot rule out a further slip in the weeks or months ahead.
New production has come on line in recent months, be it from BP’s new mega-oil field in the North Sea, record amounts of shale oil coming out of the U.S., or simply production increases by Saudi Arabia, Iraq, and Russia. Meanwhile, the robust growth in oil demand of the past years appears to be easing, especially with trade frictions looking persistent.
Oil’s price could get another knock soon, depending on the outcome of the next OPEC meeting on Dec. 6. Some variant of any of the usual three outcomes is possible: a real deal, rhetoric about a deal, or no deal.
Prospects for a real deal — one that brings significant quantities of oil off the market to boost price for a sustained period — are not particularly bright. OPEC alone is no longer capable of delivering such a deal.
Given new forces in the market, particularly America’s shale oil, OPEC countries must join with others if they are going to be able to affect a significant enough cut to oil markets to notably raise prices and restore balance. The much-heralded “Declaration of Cooperation” of December 2016 brought 11 other countries alongside OPEC’s traditional members. A real deal requires that the diverse group of OPEC and non-OPEC producers that stood together in 2016 do so once again.
Saudi Arabia can no longer deliver a “real deal” on its own. In past decades, Saudi Arabia was sometimes willing to bear the brunt of production cuts in order to stabilize the price. In the past few years, Riyadh has declared its unwillingness to do this, often invoking its experience in the 1980s when its economy stumbled as a result of it bearing deep and extended solo production cuts. In recent days, however, the Saudis seem determined to return to the production levels of 2016 — another way of saying they could cut current production by as much as 1 million barrels a day.
Another option for Dec. 6 is a deal in rhetoric across OPEC and its nonOPEC brethren, but no deal in practice. This is the most likely scenario, and the market will be watching for it closely, with an eye on Russia and Iraq in particular. Before 2016, the Russian government often pledged cooperation with OPEC but never delivered on it. Iraq has had a quiet but significant boom in recent months, reaching record levels of 4.7 million barrels a day with additional production increases on the horizon.
The final option is an overt no-deal scenario. It is the least likely of the options, but not impossible. Tensions are running high in the region, and confidence in Saudi leadership has been shaken. Should an obvious no-deal situation materialize, expect the price of oil to plunge quickly,.