Oil prices surged this week as reporting on a potential Organization of the Petroleum Exporting Countries (OPEC) production cut followed a similar pattern.
OPEC members are meeting next week in Vienna for another crack at agreeing on a compromise to cut crude production levels. Saudi Arabia, the group’s largest oil producer and most influential voice, wants to curb global oversupply to ease pressure on its domestic budget. However, Iran and Iraq, OPEC’s second and third largest producers, want to open the spigots to make up for disruptions over the past decade. Iran was just recently allowed to re-enter global crude markets after having economic sanctions lifted while Iraq’s ongoing wars have hindered production.
Leading up to each OPEC meeting this year, delegates from countries supporting a cut have expressed optimism over a deal. Leaked reports of productive talks trigger a spike in oil prices, only for non-cooperation from Iran and Iraq to derail any agreement, leading to a sharp sell-off. Rinse, repeat. The first act of the drama played out Monday when a delegate from Nigeria said negotiations on assigning quotas to individual countries made good progress. West Texas Intermediate (WTI) crude prices climbed 6.9% to more than $49/barrel Tuesday, the biggest two-day gain since September, before paring gains back to $47.50 by week’s end.
The issue is Iran and Iraq hold greater leverage. While both would like to see higher oil prices, their greater priority is short-term revenue maximization. The two countries, which together account for a quarter of OPEC crude production, also want an equal relationship with Saudi Arabia, which may ultimately have to make significant concessions to get a deal done. And then there is the matter of enforcing quotas, which historically is very difficult.