Daily Management Review

OPEC Credibility Undermined and Oil Prices Tumble after Botched Doha deal


04/18/2016




Leaving the credibility of the OPEC producer cartel in tatters and the world awash with unwanted fuel, oil prices tumbled on Monday after a meeting by major exporters in Qatar collapsed without an agreement to freeze output.
 
The market has been fearful that major government-controlled producers will increase their battle for market share by offering ever-steeper discounts and this became evident in the tensions between Saudi Arabia and Iran which were blamed for the failure of the meeting.
 
"OPEC's credibility to coordinate output is now very low. This isn't just about oil for the Saudis. It's as much about regional politics," said Peter Lee of BMI Research, a unit of rating agency Fitch.
 
Morgan Stanley said that "we now see a growing risk of higher OPEC supply," especially as Saudi Arabia threatened it could hike output following the failed deal adding that the failed deal "underscores the poor state of OPEC relations".
 
Producers have pumped 1 to 2 million barrels of crude every day in excess of demand, leaving storage tanks around the world filled to the rims with unsold fuel, oil prices have fallen by as much as 70 percent since mid-2014.
 
In an attempt to slow the ballooning oversupply, Sunday's meeting in Qatar's capital Doha had been expected to finalize a deal to freeze output at January levels until October 2016.
  
But after top exporter Saudi Arabia demanded that Iran, which was not represented, should also sign up, the agreement fell apart.
 
The Sunni Muslim kingdom of Saudi Arabia and Shia Islamic republic of Iran are currently fighting proxy wars in Syria and Yemen and compete with each other over influence in the Middle East.
 
While a cut in U.S. drilling down to 2009 levels had prevented steeper falls there, traders said only an oil worker strike in Kuwait had prevented Brent from tumbling below $40 per barrel.
 
Benchmark U.S. crude futures were down more than 5 percent at $38.31 a barrel.
 
Forecasting that the average price for U.S. crude prices would be at around $35 a barrel in the current quarter, Goldman Sachs said the Doha no-deal could a "bearish catalyst" for U.S. crude prices.
 
Analysts said that the failed agreement would also impact the broader economy.
 
"In the near-term, lower oil prices are bound to weigh on investor confidence and could exacerbate financial volatility. Concerns over financial stability in the energy sector and a further fall in drilling capex are headwinds to growth against an already fragile global economic backdrop," said Frederic Neumann, co-head of Asian economics research at HSBC.
 
There is no end in sight for the global oil glut as Iran also increasing output following the lifting of international sanctions against it last January and producers such as Saudi Arabia and Russia pumping near record levels.
 
Iran was the only OPEC member not to attend the Doha talks.
 
Riyadh, OPEC's de facto leader, insisted that all 13 members must take part in any freeze despite calls on Saudi Arabia to save the agreement.
 
"It seems that for the Saudis politics and national pride are still more important than the price of oil," said Ralph Leszczynski of shipbroker Banchero Costa.
 
Iran has refused to stabilize production, seeking to regain market share post-sanctions.
 
"Iran has no reason to auto-sanction themselves when they are just trying to get back some of the market share they lost in recent years due the western-imposed sanctions," Leszczynski added.
 
(Source:www.reuters.com) 






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