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In a last-ditch effort to cut a deal with Russia, OPEC has dispatched two delegations to negotiate with the non-member oil giant, despite publicly cancelling a larger meeting late last week.
OPEC hardliners want an agreement from non-member states to cut their production by 800,000 barrels of oil per day for 6 months, while other OPEC factions would be happy with a non-member freeze.
The cartel is set to meet on Wednesday to discuss cuts in output by member states, although some analysts believe that talks are on the verge of falling apart.
High-Stakes Meeting Has Oil Industry on Edge
Depending on the results of their meeting with Russia, OPEC’s decision about production cuts could cause a huge setback for rallying oil prices. A change in production from non-member states will make or break the OPEC deal later this week, as some members have privately conceded.
In September, OPEC narrowly agreed to a production slowdown of about 1 million barrels per day. Crude futures rose by 5% in response, but the deal has yet to be ratified.
According to recent remarks on CNBC, Helima Croft, the Global Head of Commodity Strategy at Canada’s RBC Capital Markets, thinks that OPEC ratification of the agreement could spell the difference between oil below $40 or above $50.
“It’s binary. If you get a deal done you affirm the case for 50. Failure to launch, you’re below 40,» Croft said.
OPEC Is Not Homogenous
One thing that’s important for an outsider to understand about OPEC is that the organization is far from homogenous.
The selection of the delegations being sent to Russia is telling. Algeria is a close Russian ally and a friend to Saudi Arabia. The Algerian delegation is likely expected to represent the moderate OPEC position of a non-member output freeze.
Venezuela is an OPEC hardliner, and their delegation will be the one to put pressure on Russia to make production cuts, rather than a freeze. Both Russia and Venezuela have been battered by falling oil prices, and neither wants to bear the burden of agreeing to cut production. (For more, see: OPEC Inaction Could Bankrupt Russia and Venezuela.)
OPEC hardliners think that non-member states should share in the responsibility of production cuts. (See also: Russia Works With OPEC, But Won’t Cut Oil Production.)
Saudi Arabia Staying Quiet
One voice that has been missing from the conversation is Saudi Arabia. At the September OPEC meeting, the Saudi Arabian delegation got members to agree to an output reduction by agreeing to shoulder 30% of it. (For more, see: Oil ETF’s Rally on OPEC Deal Speculation.)
According to oil minister Khalid Al-Falih, the Saudi position is that oil prices will stabilize on their own with modest OPEC-only cuts, and there’s no need for any change in non-member production.
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