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Oil flirting with the $20s gives Opec cause to cut production

Oil flirting with the $20s gives Opec cause to cut production

Oil at $20 per barrel is a stark prediction. Continued global oversupply and China’s increasingly unpredictable economy could make it a reality unless members of the Organisation of the Petroleum Exporting Countries can put aside their differences and agr

Brent crude has tumbled by 15 per cent since the beginning of 2016 to around $32 per barrel on January 12 and a number of major international banks have slashed their price forecasts. Morgan Stanley now predicts that crude could crash to $20 per barrel due to the depreciation of the yuan and fresh supplies of crude from Iran. Goldman Sachs foresaw something similar in November. Opec’s smaller members are worried.
Some members of Opec, such as Nigeria’s oil minister on January 12, are openly calling for a meeting of the 13-member group, which pumps over 30 per cent of the world’s crude. 
Yet the chances of this happening remain remote unless Opec heavyweights such as Saudi Arabia and its close Gulf Arab allies acquiesce.
The barrier to that happening isn’t the bitter diplomatic row currently raging between Saudi and Iran. Instead, it’s Russia. The world’s largest oil producer, not part of the Opec group, is expected to increase production to close to 11 million barrels per day in 2016, its highest level since the Soviet Union disintegrated, according to a Reuters poll.
The risk for Opec is that if it makes cuts and Russia doesn’t, the bloc will lose market share. According to a person familiar with the situation, Opec’s key members would have agreed to a reduction of 2 million barrels per day when the group last convened in December had Russia backed the plan. Some members of the group have continued these discussions but a deal would probably have to remove between 3 million and 4 million barrels per day from the market to be effective.
Such a significant co-ordinated cut would immediately stabilise prices. But if Opec were to meet without a tentative agreement with Russia already in place, there’s little chance of a respite in falling oil prices. The next move is Moscow’s to make.
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