Oil traders and producers are bracing for further price declines as ministers from the fractious Organization of Petroleum Exporting Countries prepare to meet in Vienna against the backdrop of a glut in global markets.
The OPEC session that starts Thursday is being billed as the cartel's most important gathering since 2008, when a severe global recession forced them to make deep production cuts to halt the slide in global oil prices.
The 12-country group now faces a different challenge as booming production from the United States and other non-OPEC countries has overwhelmed the weak growth in global crude demand and sent prices plummeting by 30 per cent since June.
Saudi Arabia and Venezuela, leading members from the cartel, held an unusual session with non-OPEC producers Mexico and Russia, for preliminary talks in an effort to agree on production cuts. But crude prices fell sharply when the Venezuelan Foreign Minister Rafael Ramirez was quoted afterward saying that no deal had been reached. Analysts said Tuesday that oil could drop below $70 (U.S.) a barrel if OPEC ministers leave Vienna without agreeing to significant production cuts.
In New York, the key U.S. benchmark, West Texas Intermediate, slumped $1.69 to $74.09 a barrel, its lowest level since mid-September, 2010. The international benchmark, North Sea Brent, fell $1.35 to $78.33 a barrel in London.
Some analysts see little positive coming from the ministerial meeting. An agreement to make significant production cuts would be met with considerable skepticism, given the recent cheating and the bitter political divisions that are undermining the once-mighty cartel, said Amrita Sen, analyst at London-based Energy Aspects.
"I think the market will sell off whatever they do," Ms. Sen said in an interview. She said most OPEC countries – notably Venezuela, Iran, Libya and Iraq – can't afford to cut production without an assurance the prices will rebound significantly, while Saudi Arabia and the other Gulf states don't want to carry the burden themselves.
OPEC – which produces a third of the world's crude – has an overall quota of 30 million barrels a day but produced 30.6 million last month, according to the International Energy Agency. At a minimum, analysts expect the cartel to agree to adhere to its quota, but such a move would put downward pressure on prices.
If ministers can't reach agreement to cut between one million and 1.5 million barrels, crude prices would likely drop below $70, Ms. Sen said.
With the largest production by far of any OPEC producer, Saudi Arabia is seen as holding the key the session. Its oil minister, Ali al-Naimi, has been sphinx-like on the kingdom's intentions. Some analysts in North America believe the Saudis are looking to inflict pain on the market – particularly producers in the U.S. where supply has grown by three million barrels a day over the past few years.
Within OPEC, the Saudis are facing demands from Iran, Iraq and Libya that they not only not be required to cut, but that accommodations be made within the OPEC quotas for them to bring lost production back on line. "There is no way the Saudis can sign up for that," said Greg Priddy, a Washington-based analyst at Eurasia Group. He expects a deal that merely recommits the cartel to hold to its 30 million barrel a day quota, and then the Saudis will make adjustments to its production throughout the winter.
There were some expectations of a deal that would see OPEC cut one million barrels a day of production, while non-OPEC countries such as Russia and Mexico would reduce supply by 500,000 barrels a day. But that "deal" seems to have fallen apart amid bickering as to which countries would shoulder how much of the production cuts within OPEC, said Phil Flynn, analyst with Price Futures Group in Chicago. Igor Sechin, the head of Russia's state-owned oil company Rosneft, said Russia isn't planning to cut production in the near future.
Mr. Flynn said the global crude production is now running two million barrels a day ahead of demand.
"If we don't get a deal, we'll probably be testing $70 soon, and if it's real contentious we could go down into the 60s," Mr. Flynn said. But he added that an agreement could lift prices back to $80 a barrel.