If Crude Production Cuts Don’t Happen, Price Could Tumble $10 a Barrel

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Crude oil prices have been volatile for the past six months, hitting a high near $54 a barrel in June and a low of around $43 a barrel in early August. The price for benchmark West Texas Intermediate (WTI) crude Monday morning is about $46.50 a barrel, and where it goes from there depends on the outcome of a meeting of OPEC oil ministers scheduled for Wednesday in Vienna.

Over the weekend, Saudi Arabia cancelled a meeting scheduled for Monday with Russia after the Saudis failed to reach an agreement with other OPEC members regarding a production cut. Hard words from some of the world’s largest oil trading houses may have helped focus the cartel’s attention on the importance of reaching an agreement to limit production.

Torbjörn Törnqvist, CEO of Gunvor Group, told the Financial Times:

We think Opec will reach an agreement. However, if they walk away without a deal the market will punish that result possibly [by] $10 a barrel or more.

That is exactly what Saudi Arabia and the other OPEC members want to avoid, but they don’t often act like it. The CEO of Italian oil major Eni’s trading group said:

Recent Opec positions seem to indicate a serious attempt to restore co-ordination. [But] we expect some short-term turbulence in the oil market, especially in the case of no agreement.”

We’ve cited these sentences from Reuters oil analyst John Kemp before, but they bear repeating because this has been the crux of OPEC’s internal divisions for decades:

In theory, the negotiations turn on mundane issues including claims for exemptions and the use of members’ own production data versus estimates from “secondary sources” to establish baselines from which to cut.

In reality, the negotiations are about the profound issue of sharing out oil revenues and diplomatic, military and economic power, which is what makes progress so difficult.

WTI for December delivery traded up about 0.7% Monday morning at $46.38 a barrel, and Brent crude traded up about the same amount at $47.58 a barrel. Both spiked to about 35 cents more than that briefly. Volatility rules for the next couple of days, at least.