Dispatch from Vienna: A Bleak Outlook for OPEC Agreement to Cut Oil Production

11/28/16 07:25AM EST

Editor's Note: Below is abridged commentary from our Energy Policy analyst Joe McMonigle who is in Vienna at the OPEC meeting. For deeper analysis in our “Dispatch from Vienna” note today as well as our prior “Report from Riyadh” note, email sales@hedgeye.com.

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VIENNA, AUSTRIA November 28 – Technical teams are meeting this morning at OPEC headquarters, but their work is being overshadowed by frosty developments during the weekend. Key differences that were glossed over in Algiers in September are once again making prospects for a meaningful deal very bleak.

Every hour on Sunday here in Vienna, it appeared that the Algiers OPEC “deal” to limit production was falling apart.

First, Saudi Arabia said it would not attend a meeting with non-OPEC producers (i.e. Russia) on Monday explaining that it was worthless (“not beneficial”) to have a meeting if OPEC was not in agreement. OPEC quickly cancelled the non-OPEC meeting.

Next, Iran went on the attack. Iran’s semi-official Mehr’s News Agency (MNA) released an article suggesting that Saudi Arabia had “declared war on oil prices” by “applying pressure on certain OPEC producers.” On the eve of the OPEC meeting, the article states that the “Saudis seem to have reneged on earlier promises” alleging that “Saudi princes intend to wage a full-blown psychological war against Iran and a number of other OPEC members in order to prevent achieving a comprehensive agreement.” While MNA is not an arm of the Iranian oil ministry, it does have many sources at the ministry and in the Iranian government – so its Sunday report is fairly significant.

Meanwhile, Saudi Arabia’s energy minister Khalid Al-Falih on Sunday suggested for the first time publicly that an OPEC deal may not be achieved. “We expect demand to recover in 2017, then prices will stabilize, and this will happen without an intervention from OPEC. We don’t have a single path which is to cut production at the OPEC meeting, we can also depend on recovery in consumption, especially from the U.S.” Al-Falih said in an interview with the Saudi newspaper Asharq al-Awsat.

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Finally, it was reported late Sunday that the Ministers from Algeria and Venezuela would travel to Moscow Monday in what is described as a last ditch effort to salvage the prior Algiers “deal” to limit production.

The Algiers “deal” pushed by the host Algerian oil minister and new OPEC Secretary General Mohammed Barkindo was only possible because Saudi Arabia and Iran agreed to remain silent on their differences. OPEC punted the hard work to bridge those differences to the OPEC meeting on November 30 but this objective remains quite difficult.

As we said in our “Report from Riyadh” client note on November 14, there was significant skepticism in Saudi Arabia about the prospects for an OPEC deal. The Saudi's made it clear to us that Iran was not exempt from participating in any production limits, and Iran’s intransigence remained an impediment to a deal. As Minister Al-Falih stated on Sunday that there is not “a single path” at this OPEC meeting, we also discussed in our November 14 note the notion of a “Plan B” approach to freeze production as an alternative to a cut.

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