Why OPEC negotiations are so important for Saudi Arabia and the oil price

By H.T.

HEDGE-FUND managers, commodities traders, ex-spooks and hacks all converge on Vienna on November 30th for the annual jamboree of OPEC, the oil producer’s cartel. Such attention may seem a little misplaced. During a year of schisms and mistrust, OPEC has repeatedly wrong-footed the markets and its credibility is in tatters. But the meeting promises to be a spectacle of brinkmanship that has oil markets on tenterhooks. At stake is not only the future of OPEC. The influence of Saudi Arabia, its biggest producer, is in play too. The kingdom, which triggered the collapse in oil prices exactly two years ago by stifling OPEC’s efforts to rig the market, finds itself backed into a corner by its arch-rival, Iran, undermined by Iraq, and increasingly hostage to the vagaries of Russia’s foreign policy. How did it get into this bind? More to the point, can it get out of it?

To understand what is at stake, go back two months to the decisive action of OPEC ministers in Algiers. After nine months of failed attempts to agree on a production freeze, they announced a collective output cut to 32.5m-33m barrels a day, as much as 1.1m b/d below current levels. That set off a rally in oil prices, even though ministers had left the hardest part until today's meeting: deciding how much of a cut each country should make. Since the meeting in Algiers, Iran has claimed it should be allowed to raise production to levels prior to the imposition of (now-lifted) nuclear sanctions. Iraq has quibbled over the level of production it should cut from. Russia, meanwhile, has been indecisive. It is not a part of OPEC, but Saudi Arabia wants it to participate to prevent it stealing market share. As a result, the oil price rally in September quickly went into reverse. Failure to make good on the promise in Algiers could push crude well below $40 a barrel.