OPEC Deal or No Deal? This is Not the Question
This comment argues that while Saudi Arabia has shown willingness to cooperate, this does not imply that the fundamentals of Saudi oil policy have necessarily changed nor that the kingdom would accept any deal irrespective of the key principles that have been guiding Saudi oil policy so far. Based on its historical record, it is possible to identify four such fundamental principles, which need to be upheld for the success of the negotiations in the OPEC November meeting:
- Saudi Arabia will not act unilaterally and any agreement should be part of a collective effort within OPEC and with other key non-OPEC producers;
- There is a certain production level that Saudi Arabia is not willing to go below;
- Any potential deal should be politically acceptable to the Saudi leadership;
- Most importantly, the deal should have a real impact on the oil price and result in higher revenues for the kingdom.
On each of these counts, the challenges facing Saudi Arabia are immense and the probability that these barriers will be overcome by November remains low. However, there is a realization within OPEC that failure to reach any sort of agreement in November will be very bearish for the oil market with the potential to erase all recent price gains. This would continue to put pressure on OPEC to try to reach some sort of agreement, though such a potential deal may not be as neat as many in the market are expecting and OPEC may just decide to postpone some of the difficult decisions on individual quotas to a later date and agree on a collective cut in the hope that the market will be as forgiving as after the Algiers meeting, which is highly unlikely. Should there be no clear agreement on cutting output and how to allocate individual quotas, Saudi signaling about cooperation will most likely continue, as it has no interest in talking prices down. But in terms of actual volumes it may be a different story altogether, with the possibility of output being maintained at high levels, or even increased until a collective agreement is reached, delaying the rebalancing process. This is a risk that both producers and the market should not ignore.