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Oil Majors Set To Lose $490 Billion If OPEC Talks Fail

By Irina Slav - Nov 29, 2016, 4:49 PM CST

OPEC is just a day away from a historical meeting that could see the cartel act in concert for the first time since 2008 to prop up prices, battered by a buildup of crude around the world over the last two years—and if it fails to agree, it will deal a huge financial blow to the industry.

If the deal gets the go-ahead from all OPEC members, the energy industry will rejoice after months of cutting costs, laying off people and striving for greater operational efficiency, among other belt-tightening measures such as quitting large-scale projects.

If the deal fails, for whatever reason, Big Oil alone stands to lose as much as US$490 billion. This is how much the international supermajors gained in terms of market value since the January trough of US$27 per barrel of Brent. According to Bloomberg, this has been the biggest gain for these companies since 2010 and compares to a loss of US$850 billion last year and US$720 billion in 2014.

At the moment, it seems the chances of either outcome are relatively even, a reality that Big Oil is not too excited about. In fact, the latest reports from the OPEC camp seem to speak of a greater possibility for a failure of the deal than for a success. Big Oil may have to brace itself for some more losses.

First, the Saudis—the drivers of the negotiations that started in late September in Algeria--now hint quite openly that they may themselves pull out of a production cut. “We expect the level of demand to be encouraging in 2017, and the market will reach balance in 2017 even if there is no intervention by OPEC,” said Oil Minister Khalid al-Falih this Sunday, conceding, however, that “OPEC intervention aims to expedite this balance and the market recovery at a faster pace.”

These words raised many hackles, and a day later, yet another urgent OPEC meeting followed. At that meeting, according to reports, Iran and Iraq had agreed to freeze production at current levels, though the weight of this agreement is questionable, as Fox News noted, the Iraqi officials were quite jittery, constantly calling their superiors.

Related: Ahead Of OPEC’s Meeting, API Inventory Report Shows Major Crude Build At Cushing

Unnamed sources present at the Monday meeting, however, told Reuters that OPEC’s number-two and number-three are still resisting Saudi Arabia’s calls to cut their output, determined to build their market share.

Meanwhile, Russian President Vladimir Putin announced after a meeting with his Iranian counterpart Hassan Rouhani that the two countries had agreed to “coordinate their production.” What this coordination would entail remained shrouded in mystery, reinforcing a feeling of suspicion among some observers.

On Tuesday, this suspicion grew as Russia said it would not be attending the Wednesday meeting of OPEC. Now, there isn’t really a reason for it to do so, as it seems this is the season of meetings for the world’s biggest oil producers and another one can always be arranged.

Related: Shell Considering Dumping Its Iraqi Oil Fields

Perhaps even worse, from the producers’ perspective, is the fact that even if a last-minute miracle happens and everyone in OPEC gets on the production cap bandwagon, the effects of the production cut may well be short-lived. Nigeria and Libya are exempt and expanding their output. Non-OPEC producers such as Brazil and Azerbaijan are doing the same, and Russia is promising nothing more than a freeze at current levels, which are record-high. U.S. output is also growing.

Taking 1.1 million barrels of OPEC oil off international markets will just free up more space for other producers who are, for the moment, comfortable enough—or so it seems—with benchmark prices, as suggested by a Reuters report about the Asian oil market. According to it, Asian buyers are pretty happy with non-OPEC oil and may well continue to buy from Azerbaijan, the U.S. and Europe if OPEC’s prices rise. Ultimately, a product cut agreement could defeat its own purpose.

By Irina Slav for Oilprice.com

http://oilprice.com/Energy/Crude-Oil/Oil-Majors-Set-To-Lose-490-Billion-If-OPEC-Talks-Fail.html