Oil prices fell considerably as the upcoming Organization of the Petroleum Exporting Countries (OPEC) meeting is only days ahead. The main subject on the meeting’s agenda is to discuss the possibility of limiting the crude oil output by the member countries in an effort to decrease supply and hence increase prices.
However, there has been considerable scepticism by a large number of investors on whether the organisation’s members would make a unified decision to cut output during the meeting on 30 November. There are also questions on the effectiveness of a possible production limitation given that there is already oversupply within the markets.
There have been intense clashes between producers about limiting crude oil production given that there is a direct impact on market share. The market equilibrium was shaken when the U.S. intensified its production of crude oil through shale oil technology which was a big reason for the crude oil futures prices nosedive in mid-2014. The reduction of prices has put some of the OPEC members in a difficult position as smaller crude oil producers with higher costs mean weaker economic growth. There are now concerns that a possible failure to reach an agreement during the upcoming OPEC meeting might trigger chain reactions by countries which could look to exit the organisation.
There have been attempts to improve the situation, large producers Saudi Arabia and Iran were considering the control on production during the December 2015 meeting. But Saudi Arabia’s agreement was conditional on Russia’s decision to agree on production cut too otherwise they would stay out. There was a more recent effort to stabilise crude oil prices, during the April meeting this year but Saudi Arabia would consider a deal only if Iran would be part of the agreement. In contrast, Iran pledged to increase production following January’s lift of sanctions and so it was impossible to reach an agreement.
There are limited chances that Iran, Libya, and Nigeria will attend this week’s meeting. Moreover, Russia’s recent comments through its Minister of Energy were discouraging as he said that the agreement of limiting crude oil production would directly work against their plans of output increase during next year. But for those who are predicting that an agreement might be reached, the terms and conditions of that deal is anybody’s guess given that OPEC has no authority to impose compliance. Additionally, it is also unknown whether any of the non-OPEC nations would participate.
Crude oil prices fell on Friday by 4.4% to $45.94 per barrel. The price of the “black gold” on a weekly basis also decreased by 1.9% as investors might not be very confident on whether there will be a positive impact from Wednesday’s meeting.
There are concerns that any agreement reached by OPEC might not have a large impact on the crude oil’s prices because the cut would only be a small fraction of the global output. Additionally, the level of impact may even be smaller given that the shale oil production by the U.S. might be increased in the future. Therefore, it will be interesting to see how crude oil prices will perform after this week’s meeting.