Oil in the $20s, Bunkers in the $100's Is the Price of Failure as the Countdown Begins for OPEC's Cutback Summit

Monday November 28, 2016

With less than 48 hours left before the Organization of the Petroleum Exporting Countries (OPEC) convenes in Vienna to ratify its oil production output deal, analysts are warning that this time around the cartel will be severely punished if the talks aren't successful – with oil plummeting to the $20s being one scenario.

Such decline in price could put HFO bunkers in the low $100/mt range in the Primary ports, down from their current $288/mt, Ship & Bunker data indicates.

Although the normally optimistic Helima Croft, head of global commodities strategy at RBC Capital Markets, still believes the deal will still be closed, she told CNBC that "The problem for all of these countries is if you don't get it done on Wednesday, you can't jawbone this market any more, you're done; you're going to need to find a new trick next year."

Should the deal go south, Croft predicted that prices will drop quickly and sharply to $40; conversely, she says the price will rise to $50 if all goes well on Wednesday.

But in a separate interview with CNBC television, Croft was even more severe in her outlook,  speculating "that if we get a failure to launch, we'll be sub-$40 in terms of prices."

Amrita Sen, chief oil analyst at Energy Aspects, says although the chance of a summit success "is too 50-50" and therefore too early to call, she complained to Bloomberg that "when you ask for the details about how they're going to cut, nobody wants to give an answer, so this isn't going to be an easy one."

With expectations for a positive outcome so high, Sen worries that if the summit collapses "we can see a very sharp correction; I wouldn't be surprised if we see $20s again."

Michael Cohen, head of energy commodities research at Barclays, agrees that OPEC is under significantly more pressure now to close the deal than when it first convened to discuss cutbacks, and for three reasons: "One is Trump was elected; two, the earnings season showed U.S. oil producers were more resilient; and the third is the return of output from Libya and Nigeria."

Cohen is referring to U.S. President-elect Donald Trump's clear-cut support of of U.S. drillers and pipeline development, either of which could be encouraged depending on what transpires in Vienna.

He added that with all these factors coming into play,  "Something's got to give here, and the recipe for Saudi Arabia and Iran to come to the table and put something together is getting more difficult; we should all prepare for big oil price gyrations in the next few days."

Indeed, it's becoming less clear if anything good will emerge from Vienna even in the unlikely scenario that all parties reach consensus: last week, Fatih Birol, executive director of the International Energy Agency, reminded media that even if a deal is reached, a desired oil price surge could be snuffed out as supply from U.S. producers floods the market.

He also remarked, "Many people expect a freeze or a cut from the Vienna meeting, but we should also think about the next steps after the possible cut or freeze," adding that "This is the first time in the history of oil that investments are declining for three years in a row: as a result, we may see bigger difficulties in a few years time."