Pressure builds on OPEC to set aside differences

If members of OPEC can put aside their political differences at a meeting Wednesday in Vienna — and that's a big if — they may stabilize oil prices for the first time since the same members sent the commodity into a freefall two years ago.

But skepticism about their ability to reach a lasting accord lingers.

The fallout from the Organization of the Petroleum Exporting Countries' November 2014 failure to reach a deal on production cuts sent crude oil into a downward spiral that culminated in a brief trip below $30 per barrel in early 2016.

Now, the energy industry is again training its gaze closely on OPEC as member countries and Russia gather Wednesday in an attempt to solidify a budding deal to cut production to ease the global glut of oil.

Hopes of a deal have injected some life into oil prices. The price of West Texas Intermediate crude oil, the U.S. benchmark, was up 2.5% to $47.22 at 1:11 p.m. Monday.

Any agreement to slash production is impossible or irrelevant without oil giant Saudi Arabia's approval. Geopolitical tension between Saudi Arabia and Iran blocked the cartel from reaching an accord as recently as early this year, fueling a perception that infighting has weakened OPEC's influence.

But this time might be different, despite lingering disputes between majority-Sunni-Muslim Saudi Arabia and majority-Shiite Muslim Iran. After oil's crushing slide, all parties have a vested interest in propping up the commodity to shore up their balance sheets.

JPMorgan Chase energy analysts pegged the chance of a deal at 60% in a research note. Deutsche Bank analyst Ryan Todd projected a "modest cut" with oil settling in the low $50's in the near term.

DNB Markets analyst Torbjørn Kjus said in a research note that there are "many obstacles for a deal," but he still projects that the 11 member countries expected to sign on will collectively cut production by 4%, or 1.1 million barrels per day based on October's rate of 33.6 million.

"Members have to agree to collective action, pledge to share the burden of cuts, and do so in a way that is transparent and has credibility with the market," Kjus said. "The last requirement is of course extremely important in order to achieve a price effect from the cuts. For Saudi Arabia a cut deal that does not lead to higher oil prices is meaningless."

The deal assumes that Iran, Libya and Nigeria are exempted from the cuts. Iran has refused to agree to cuts based on the premise that it has a right to increase production after sanctions were lifted, while Libya and Nigeria are returning to normalized levels following political disruption earlier this year.

But some experts are skeptical that Saudi Arabia will agree to cut production while allowing Iran to snap up market share.

Hossein Askari, Iran professor of business and international affairs at George Washington University who has studied the oil industry for years, said Saudi Arabia does not want to relinquish its influence in OPEC and does not want to give up significant market share.

He said OPEC agreements often fizzle out with little enforcement.

"There is always the likelihood that they announce an agreement and then cheat a few months later," Askari said. "There would be a temporary increase in oil prices and then they would revert back to where they were."

Whether Russia signs on is another factor. Although not a member of OPEC, Russia is considered crucial to the deal. The Russian energy minister recently said the country would freeze production at current levels, but JBC Energy analysts said in a research note that the country's commitment to the accord "remains in doubt."

Complicating factors for OPEC and Russia is the surge of U.S. oil production. Shale-oil producers in the U.S. can speed up production quickly, which many are expected to do if and when the commodity tops $50 again.

OPEC is unlikely to cut production sharply to avoid relinquishing additional market share to U.S. producers, whose sudden surge has been blamed by many for triggering the original glut of oil that undermined prices.


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