When OPEC reached a deal with Russia and other producers in 2016 to end a two-year oil price slump, it was a relatively straightforward affair. Saudi Arabia, for example, is believed to be exceeding its 2016 quota by about 1 million bpd this month.
Brent crude, the global benchmark, fell on Thursday to a low of $54.65/bbl, compared to $27.10 in January 2016. Brent traded as high as $86.74 in early October.
The alliance announced it was slashing output, each country agreed to a specific production quota and international oil prices rallied about $7 a barrel. At today’s Brent price of $55/bbl, only uber-wealthy and sparsely populated Kuwait will be able to make ends meets next year.
Heading into next week’s OPEC meeting, few analysts anticipate such decisive action or so clear-cut an outcome, even with the oil market near the bottom of the worst price plunge since the 2008 financial crisis.
To be sure, top OPEC producer Saudi Arabia and its Gulf allies are widely expected to orchestrate another output cut when producers meet in Vienna on Thursday. As oil revenues fall, governments could soon face social unrest due to slower economic growth and higher unemployment.
The signals are clear: Forecasters think the oil market will be oversupplied next year, the cost of crude has tumbled more than 30 percent in just eight weeks, and most OPEC members don’t stand a chance of balancing their budgets at current price levels.
Analysts now expect the meeting to culminate with an official statement that leaves the market scratching its head over just how many barrels OPEC intends to take off the market.
In late 2015, when oil prices plunged after Saudi Arabia imposed a “pump-at-will” policy that flooded the market, social trouble spread across OPEC, sending supply outages to a peak of 2.8 MMbpd though the number was exacerbated by Western sanctions on Iran.
“I do think there will be OPEC math,” said Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions. “You’ll have to figure out the cuts from baseline levels. I don’t think it will be necessarily all that clear based on the statements.”
That could result in a repeat of OPEC’s June meeting. With oil prices rising rapidly, the group agreed to reverse course and hike output but offered little in the way of a blueprint.
The OPEC alliance agreed two years ago to keep 1.8 million barrels per day off the market, but by this last April, the group’s output had fallen by about 2.7 million bpd. Instead of clearly stating they would correct by restoring about 1 million bpd, producers vowed to return to 100 percent compliance.
The group also failed to release revised quotas for each nation. Since then, even with new U.S. sanctions on Tehran, OPEC supply outages have fallen to less than 1.7 MMbpd, according to Bloomberg News calculations based on data from the U.S. Energy Information Administration.
Markets responded to OPEC’s ambiguity by pushing oil prices higher, the opposite of what the cartel intended. In the following months, U.S. crude rallied to a nearly four-year high at $76.90 a barrel, driven by fears of oil shortages ahead of U.S. sanctions on Iran.
The price has since tumbled 35 percent over the last eight weeks, hitting a 13-month low at $49.41 on Thursday. John Kilduff, founding partner at energy hedge fund Again Capital, says traders may punish oil prices if the OPEC statement once again disappoints the market.
Despite the sharp fall over the last two and a half months, oil prices remain well above the depths of 2015-16 crisis. “If this OPEC meeting falls apart, you could see prices rapidly fall down to potential support down to $42,” he told CNBC’s “Power Lunch” on Thursday.
Of all OPEC nations, only Kuwait can cover its budget with oil prices below $60/bbl, according to data from the International Monetary Fund. Qatar, which is leaving the cartel on Jan.
“There is a zone of congestion on the charts between $45 and $50, so it will be a tough slog, but your downside objective is $42.” OPEC’s technocrats have signaled that the alliance needs to cut 1 million to 1.4 million barrels a day in order to deal with the looming oversupply.
But sources recently told The Wall Street Journal that OPEC is wary of announcing cuts on that scale. That is largely because Saudi Arabia enters Vienna next week badly bruised by revelations that agents of the kingdom murdered Washington Post columnist and U.S. resident Jamal Khashoggi last month.
The upshot is Saudi Arabia must push through new production cuts without alienating Trump, who will be critical in shielding them from U.S. lawmakers. Trump’s public criticism and his administration’s back-channel talks played a role in persuading OPEC to hike output in June.
One strategy reportedly under consideration would see OPEC announce that its members will maintain the quotas they announced in 2016. In reality, that would mean several key producers would cut output, since they are currently pumping above those quotas.
Iraq exceeded its quota by about 300,000 bpd in October, while the United Arab Emirates topped its output cap by nearly as much. Jason Tuvey, analyst at Capital Economics, a London-based consultancy, said the Saudi budget “appears to be premised on prices averaging $80/bbl.”