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Oil-Economy

Botched oil deal casts doubts on Opec's credibility

Qatar's Energy Minister Mohammad bin Saleh al-Sada attends a news conference following a meeting between OPEC and non-OPEC oil producers, in Doha
Qatar's Energy Minister Mohammad bin Saleh al-Sada attends a news conference following a meeting between OPEC and non-OPEC oil producers, in Doha Reuters/Ibraheem Al Omari

Oil prices plunged on Monday for the second time this year after the world's top producers failed to reach a deal to cap production. The price of oil has risen recently, partly due to speculation that some exporters would limit supply. But rifts between Saudi Arabia and Iran scuppered plans of a freeze and have laid bare tensions within oil producers' cartel Opec.

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It was always going to be a tough sell. Trying to get the world's top oil producers to curb their production to January levels - when prices took a severe beating - was never going to be easy.

With Saudi Arabia and Russia pumping near-record levels and Iran also increasing output following the lifting of international sanctions against it, the freeze proposal appeared to be going against the grain.

Regardless, Opec's failure to come up with one voice in tackling global oversupply at the meeting in Qata has raised doubts about its ability to affect change.

"When there's a fragmentation you can't have a cartel," Andre Bordes, CEO of the Geneva-based Academy and Finance told RFI. "Because you will always have some players who will want to increase production - and they need to- even if prices are falling. They need to stay in business."

This is the case of Iran. After years of isolation, it is not prepared to accept a cap on its oil production so soon and no one should expect it to, accord analysts.

"Clearly Iran was the big obstacle here," Richard Mallingson, an expert at Energy Aspects in London, told RFI after Teheran boycotted the Doha talks.

"Its refusal to participate in a production freeze shouldn't have come as a surprise to the Saudis, the Russians or anyone else going into the meeting in Doha. So the question was 'Why was the market given the indication that a deal could still be reached, only for that to then break down on Sunday?'."

Saudi Arabia had been demanding that Iran be included in a deal despite Tehran's repeated assertions it would not cap production until it had reached pre-sanctions levels of output.

Where does that leave the markets now?

Analysts are split. Bordes says we're likely to see falling oil prices as producers ramp up their battle for market share by offering ever-steeper discounts.

"Iran is going to increase its production and try and attract more international investments," Bordes reckoned. "It has capacity of four million barrels per day and right now it's exporting 1.5."

He also put down slow growth in China as another factor for declining oil prices. 

"Oversupply can't be absorbed if there's no demand," he points out.

However, Richard Mallingson of Energy Aspects, thinks oil prices will recover despite the market's jitters.

"We're seeing a steady reduction in supplies because of a combination of geopolitical disruptions in countries like Nigeria and Iraq and also lower investment from oil companies around the world, which is leading to a decline in production from fields," he comments.

This weekend also, global supply was constrained by industrial action in Kuwait, where a walkout by thousands of workers halted oil production.

"On the one hand, you have more negative sentiment because of Doha but at the same time the actual fundamentals, the physical indications of the market are improving," he said.

Mallingson ruled out a return to the record low levels that dogged the markets at the start of the year and predicts a more sustained recovery of prices from July.

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