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Oil Prices Drop After Top Producers Fail To Reach Deal: Will It Drop To 20 A Barrel?

By Andrew Galbreath
Published on: 15:55 PST, Apr 18, 2016

Oil prices dropped wildly on Monday after talks between the world’s biggest oil exporters in Doha, Qatar, concluded without a deal to freeze output.

The meeting between the oil-producing nations was aimed at reaching the first global deal to cap oil production in 15 years, which would have eased the global supply glut, but the talks failed to reach a deal due to opposition from Saudi Arabia and ended Sunday night.

This news does little to ease fears the collapse of the talks could start a new round of dramatic falls in the price of oil per barrel. According to the Financial Times, a conflict that arose between Saudi Arabia and its regional rival Iran has been blamed for the collapse of the talks, which were the most promising chance to raise the global cost of crude oil higher.

“Delegates said Saudi Arabia had in effect torn up an earlier draft of the deal as it decided it could not be party to an agreement that would give Iran any leeway. Tehran had refused to join the freeze as it rebuilds its oil exports after years of sanctions.”

OPEC and its oil-rich partners were hoping that Riyadh would comply with an output freeze, or at least be willing to tolerate Iran’s involvement. But the deputy crown prince, Mohammed bin Salman, refused to cooperate with any deal in which Iran was a partner. Ironically, Saudi unwillingness to cooperate with Iran may have given crude oil prices the green light to go into free fall, which will cause a tremendous amount of damage to the kingdom’s already suffering economy.

Sure enough, the failure to reach an agreement was followed by another drop in oil prices. In the wake of the Doha stalemate, crude oil fell as much as seven percent in trading in Asia before bouncing back slightly, and FT reported that oil ominously fell below $40 a barrel, which may herald further drops to come.

“Brent, the international benchmark, was down 3.9 percent at $41.42 a barrel in afternoon trading in Asia while West Texas Intermediate, the US marker, was down 4.2 percent at $38.66 a barrel.”

The breakdown of these talks has put the global oil market in a precarious position, as big oil-producing nations have to decide whether to follow the Saudi-Iranian example and protect their own market shares, and supply will once again overwhelm demand as it did earlier this year, when oil prices dropped below $30 a barrel in January.

Financial analysts have been predicting the possibility of oil dropping to $20 or even below for months now, according to a Bloomberg report from February.

“Oil could drop below $20 a barrel as the search for a level that brings supply and demand back into balance makes prices even more volatile, Goldman Sachs Group Inc. predicted. With capacity to store oil exhausted in some places, prices may need to drop low enough to halt crude output that can no longer be stockpiled, said Jeff Currie, Goldman’s head of commodities research.”

To some extent, oil prices were “saved” by a massive oil worker’s strike currently going on in Kuwait which effectively shut off half the country’s oil production on Sunday, as MarketWatch reported. Kuwait’s exports fell from 3 million barrels a day to 1.1 million almost overnight.

“There is little doubt that the Kuwaiti strike is limiting the slide in prices,” said James Williams, energy economist at WTRG Economics, said to MarketWatch. The Kuwaiti strike may be the only thing preventing a reversal of all the gains oil had made in the build-up to the meeting.

The market reaction this week will be open to speculation, but in the wake of the accord’s failure petroleum prices seem volatile and more likely to drop. The primary cause of recent rises to around $40 a barrel has been in anticipation of oil-producing countries freezing production, allowing prices to rise and salvaging their hurting economies.

Now, hopes have been dashed, and higher oil prices seem further on the horizon than ever.

[Photo by Sean Gallup/Getty Images]

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