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Saudi Energy Minister Khalid al-Falih during a meeting of their Joint Ministerial Monitoring Committee in Abu Dhabi on Nov. 11, 2018.KARIM SAHIB/AFP/Getty Images

Saudi Arabia and other leading oil exporters are eyeing production cuts to boost prices after previous forecasts of a tightening market failed to materialize and crude prices dropped.

U.S. President Donald Trump’s decision to ease up on Iranian crude sanctions that kicked in at the beginning of the month, coupled with concerns about a slowing global economy, have driven oil prices down sharply from recent highs in early October when analysts were warning that demand was about to exceed supply.

Both North American and international benchmark crude prices have fallen by about 20 per cent from their highs six weeks ago, a sell-off that meets the definition of a bear market. Last week, West Texas Intermediate marked its longest losing streak in 34 years by declining for 10 straight days to close at US$60.10 a barrel, while Brent crude closed below US$70 a barrel.

The weakness in global oil prices further hurts Canadian oil producers, who had already missed out on the best part of oil’s earlier rally. Transportation bottlenecks and growing supply has resulted in rapidly rising inventories in Alberta and record-level price discounts on Western Canadian crude. In recent weeks, Canadian heavy oil has traded at a discount of more than US$40 a barrel to WTI, leading to some calls within the industry to curb oil output in Alberta, at least temporarily.

Saudi Arabia and Russia are again leading discussions about supply cuts, after increasing production in late summer and early fall to address shortages. At a meeting in Abu Dhabi on Sunday, the Saudis said they will reduce supply by 500,000 barrels a day for the month of December to reflect lower seasonal demand, although the country’s energy minister, Khalid al-Falih, gave no commitment to a more permanent cut.

“I think ideally we don’t like to cut. Ideally, we like to keep the market … liberally supplied and comfortable," he said. "We will only cut if we see a persistent glut emerging and quite frankly we are seeing some signs of this coming out of the U.S., [but] we have not seen the signs globally.”

The Organization of Petroleum Exporting Countries meets in early December, and if prices continue to fall, the cartel and its non-OPEC partners will face pressure to cut production, as they did two years ago, to boost the slumping crude market.

In the absence of further political intervention, a mild supply surplus would keep downward pressure on prices for the next several months, says Rory Johnston, commodity economist at the Bank of Nova Scotia.

Traders had anticipated the market would tighten considerably when U.S. sanctions against Iran commenced on Nov. 4., and some analysts predicted International Brent could hit US$100 if they were enforced as aggressively as Mr. Trump had signalled.

The Trump administration pulled out of the multistate agreement to rein in Tehran’s nuclear weapons program against the wishes of the European Union and Russia. Last week, the United States imposed sanctions on Iranian banking and oil exports, but granted 180-day waivers to six countries that are major crude customers of Iran, a move that will result in higher than anticipated global supplies.

Brent hit a peak of US$86.24 a barrel on Oct. 3, while West Texas intermediate – the North American benchmark – rose to US$76.90 a barrel. Then came the big drop. “You had a lot of supply coming on in the last month or two,” Mr. Johnston said.

Saudi Arabia, Russia, the United States and Canada are all producing at or near record levels, after the Saudis and Russians agreed the boost supply to offset Iranian losses.

At the same time, the International Monetary Fund and other global forecasters are warning about slow economic growth, especially in key consuming markets such as India and China. Plunging currencies in emerging markets amplified the run-up in crude prices that occurred earlier this fall.

“On the way up, you had this double whammy of impact on emerging market consumers,” said Ian Nieboer, head of research at Houston-based RS Energy Group. “There are a lot of reasons to be concerned about emerging-market demand … All the pieces are in place right now to have softness in the next few months."

As well, speculators in oil futures reacted to the sell-off in equity markets by dumping crude contracts that bet on rising prices.

“Oil is a financial asset as much as it is a physical one, and there was a big change in the market psychology,” said Jim Burkhard, lead global crude analyst with IHS Markit.

The wild card over the coming winter will be Mr. Trump and his pursuit of Iranian sanctions. The President was clearly worried about the impact that higher oil prices were having on U.S. consumers' sentiment ahead of last week’s midterm elections, market analysts said, and his administration signalled it was willing to grant waivers to some buyers of Iranian oil well ahead of the vote.

But with the election out of the way, he may return to a more bellicose stand and turn the screws on Iran’s access to oil markets with its estimated 1.5 million barrels a day of exports. In the summer, administration officials talked about driving Iranian oil exports to zero.

While that goal is unlikely to be achieved, the degree to which Washington pursues it – along with the state of the global economy – will largely determine whether OPEC and its allies once again have to cut production to defend crude prices.

With files from Reuters