Oil prices drop after major producers fail to coordinate output deal

After a meeting by major OPEC and non-OPEC oil producers fell apart in Qatar on April 17, oil prices plummeted 5% early on Monday, which left the world with unwanted fuel.

International benchmark Brent crude futures were trading at US$40.86 per barrel at 0029 GMT, down 5.2 percent since their last settlement.U.S. crude futures were down 5.7 percent at US$38.06 a barrel.

Around 18 oil exporting nations, including Russia, gathered in Doha, Qatar for what was expected to be the rubber-stamping of a deal to stabilize output at January levels until October 2016. But the deal to freeze oil outputfell apartafter OPEC’s de factor leader Saudi Arabia demanded that Iran join in despite calls on Riyadh to save the agreement and help prop up crude prices. Saudi Arabia told participants it wanted all members of the Organization of the Petroleum Exporting Countries to take part in the freeze, including Iran, which was absent from the talks.

This development will revive oil industry fears that major producers are embarking again on a battle for market share, especially after Riyadh threatened to raise output steeply if no freeze deal were reached. Iran is also pledging to ramp up production following the lifting of Western sanctions in January, making a compromise with Riyadh almost impossible as the two fight proxy wars in Yemen and Syria. Barclays said in a note to clients that “the much-awaited meeting exposed the political rift between Saudi Arabia and Iran, and ultimately doomed the agreement.”

“The failure is negative from the psychological point of view. It shows the inability of all sides to cooperate,” said Gary Ross, the founder and executive chairman at New York-based consultancy PIRA.

“This meeting and its outcome should have built confidence that the oil market rebalancing was close at hand, as well as building a circle of trust among producers for possible future cooperation and coordinated action. In this regard, the meeting was a complete failure,” Barclays added. “The failure of the talks gives the market another clear indication (similar to the failed December 2015 OPEC meeting) that OPEC’s relevance in this market environment has faded, and its ability to coordinate with members outside the group is equally difficult.”

Oil prices have fallen by as much as 70% since mid-2014 as 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.Beyond the failed deal, however, there were signs of a tightening market due to an oil worker strike in Kuwait which may have cut its production from 2.85 million barrels per day to just 1.1 million barrels per day.

Barclays also stated that as a result of this, Brent would likely average US$36 per barrel during the second quarter of this year as global oversupply persists.

Source: Reuters