Clyde Russell, Reuters
It was the worst possible outcome for oil producers at their weekend meeting in Doha, with their failure to reach even a weak agreement showing very publicly their divisions and inability to act in their own interests.
Expectations for the meeting had been modest at best, with sources in the producer group predicting an agreement to freeze output. But even this meager hope was dashed by Saudi Arabia’s insistence Iran join any deal, something the newly sanctions-free Islamic republic wouldn’t countenance.
From a producer point of view, an agreement including Iran that shifted market perceptions on the amount of oil supply available would have been the best outcome.
The acceptable result would have been an agreement that froze production at already near record levels, with an accord that Iran would join in once it had reached its pre-sanctions level of exports.
What was delivered instead was confirmation that the Saudis are prepared to take more pain in order not to deliver their regional rivals Iran any windfall gains from higher prices and exports.
The meeting in Qatar on April 17 effectively pushed a reset button on the crude markets, putting the situation back to where the market was before hopes of producer discipline were raised.
What happens now is that the market will have to continue along its previous path of rebalancing, without any assistance from the Organization of the Petroleum Exporting Countries (OPEC) or ally Russia.
Brent crude fell nearly 7% in early trade in Asia on April 18, before partly recovering to be down around 4%.
The potential is for crude to fall further in coming sessions as long positions built up in the expectation of some sort of producer agreement are liquidated in the face of the reality of no deal.
It’s likely that recriminations will follow for some time among the oil producers, with the Russians and Venezuelans said to be annoyed at what they see as the Saudi scuppering of a deal that had almost been locked in.
Future Deal Undermined
This will make it harder for any future agreement, with the OPEC meeting on June 2 the next chance for the grouping to reach some sort of agreement.
For the time being, OPEC’s credibility is shot, and won’t be restored by even a future agreement as it will take actual, verifiable action to convince a now skeptical market.
However, as the events in Doha showed, the Saudis are unlikely to agree to anything in the absence of Iranian participation, and that is also equally unlikely.
While the Mexican standoff between the OPEC rivals continues, the oil market will have to continue rebalancing through other paths.
What rebalancing has been achieved so far hasn't really involved OPEC or Russia, with those countries pumping at, or close to, record levels in recent months.
Rather, supply from other producers has gradually fallen, such as Canadian oil sands and U.S. shale.
This process is likely to continue to prove fairly slow, meaning that crude markets are probably in for an extended period of more than adequate supply.
Of course, demand is the other side of the equation, and here again the process is fairly gradual, although more constructive, especially if China's economy is regaining some momentum as suggested by recent data, and India’s fuel demand continues to motor along.
But for now, the market will take the collapse of any producer discipline, coupled with the obvious tensions between the Saudi and Iranian/Russian camps as a sign that oil is once again in bearish territory.
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