Oil prices tumble following failed OPEC talks

Oil prices declined on Monday in the wake of failed OPEC meeting talks. The failed talks about freezing output halted a bounce in crude prices that increased the ruble highest the strongest since November 2015 reducing pressure on Russian economy as it battles the second year of recession.


Elsewhere, the Persian Gulf markets opened sharply lower but bounced back after OPEC members failed to agree to cut production. Concerns now have been renewed about the impact of low crude prices to the Persian Gulf economies. Saudi Arabia’s Tadawul increased 0.06% after dipping 1.3% at opening. Dubai’s major stock climbed 0.1% after rebounding from a 2% drop at opening. Kuwait bucked declined #% following employees strike on Sunday, while Abu Dhabi’s index remained calm and Qatar’s bourse rose 0.4%.

Political tensions between Iran and Saudi Arabia were blamed for the collapse of the talks. Analysts raised concerns on industry fears that top government-run producers might extend their battle for market share and even offer lowest discounts. According to Peter Lee, a researcher at BMI, “OPEC’s credibility to coordinate output is now slight, and this isn’t just about oil for the Saudis. It’s as much about regional politics.”

Market Insights

Morgan Stanley said that the failed talks “highlights the poor state of OPEC relations.” He added, “We now see a growing risk of higher OPEC production,” especially as Saudi Arabia said it could increase production following the collapsed talks. Oil prices have tumbled 70% since June 2014 due to producers increasing output up to 2 million barrels a day exceeding demand. Global storage tanks must be full to the brim with crude oil.

Sunday’s Meeting at Doha had been expected to bring a solution to cut output and slow the increasing overproduction. Iran, which was not present at the talks, influenced their collapse after leading oil exporter Saudi Arabia demanded Iran ought to sign up too.

Brent crude futures dropped 7% in early Monday trading before rebounding to $40.97 per barrel at 0647 GMT and still low 2.15% since their last.

Analysts Opinions

Analysts had projected steeper declines for Brent futures were it not for the oil workers’ strike in Kuwait preventing the prices from falling to below $40 a barrel. Moreover, the cut in U.S. drilling to 2009 levels prevented further declines. Benchmark U.S. crude futures dropped more than 5 percent at $38.31 a barrel.

Analysts have warned the failed talks could impact the larger economy. Frederic Neumann, co-head of Asian economics research at HSBC said, “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 decline in drilling capex are headwinds to growth against an already fragile global economic backdrop.”

The global oil gut seems to have no near end with Saudi Arabia planning to increase production, Russia producing at near record highs and Iran set to increase production following the lifting of sanctions in January.  Despite calls to Saudi Arabia to save the talks, the OPEC’s de facto leader insisted that all 13 members must be present to take part in the talks to freeze output.

Ralph Leszczynski of shipbroker Banchero Costa said, “The Saudis politics and country pride are still more crucial than the price of oil.” On the other hand, Iran has declined to stabilize output as it seeks to regain market share after sanctions were lifted. Leszczynski added, “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 sanctions.”

While tumbling oil prices continue to hurt producers, they can also benefit consumers.

Nick Jason

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Nick Jason is a Senior Market Commentator and Analyst

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