Oil prices slid on Monday after a meeting between major producing nations on a proposed output freeze fell apart, leaving the world grappling with an excess of unwanted crude. However a major slide in prices was avoided and early falls in world equity markets had reversed by later afternoon trading in Europe.
The some 18 oil exporting nations, including non-Opec Russia, had gathered in the Qatari capital of Doha for what was expected to be the rubber-stamping of a deal to stabilise output at January levels until October 2016.
But the deal crumbled when Opec heavyweight Saudi Arabia demanded that Iran join in despite its repeated assertions it would not do so until it had reached pre-sanctions levels of output.
“Saudi Arabia intentionally torpedoed the agreement and was willing to accept its failure. This has severely damaged the credibility of oil producers in general and of OPEC in particular,” Commerzbank said in a note.
Brent crude futures fell almost 7 per cent in early trading on Monday before recovering to around $42 per barrel in late trading, down some 2.5 per cent since their last settlement.
Traders said an oil worker strike in Kuwait that cut the country’s crude output by some 60 per cent prevented Brent from tumbling below $40 per barrel. A cut in US drilling down to 2009 levels had prevented steeper falls there.
Benchmark US crude futures were down by less than per cent in late afternoon at just over $39 a barrel after falling as low as $37.61 earlier in the day.
Brent crude had reached a four-month high of just under $45 per barrel last week on hopes that the freeze deal would slow ballooning oversupply. Its collapse revived some fears that government-controlled producers will ramp up their battle for market share by offering ever-steeper discounts.
Morgan Stanley said the failure sparked “a growing risk of higher OPEC supply,” especially as Saudi Arabia threatened it could hike output following the failed deal. It could also impact the broader economy, thus putting demand at risk.
“In the near-term, lower oil prices are bound to weigh on investor confidence and could exacerbate financial volatility,” said Frederic Neumann, co-head of Asian economics research at HSBC. “Concerns over financial stability in the energy sector and a further fall in drilling capex are headwinds to growth against an already fragile global economic backdrop.”
But others said OPEC’s failure to act, and the subsequently lower oil prices, would simply shift rebalancing away from the cartel and towards higher cost producers.
“Once again the Saudis have delivered a hammer blow to fellow producers,” said David Hufton, managing director of broker PVM.
“It promises to be the final nail in the coffin for those shale producers and their lenders hanging on for a short-term price reprieve.”
Reuters
