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2016-11-30 15:32:12
Oil Prices Soar on Hope for an OPEC Deal to Cut Production

VIENNA — Oil markets were volatile on Wednesday, as they tried to divine what OPEC would decide at its latest meeting.

With crude oil prices still at less than half the levels of two years ago, all 14 members of the Organization of the Petroleum Exporting Countries agreed this fall to lower the group’s collective output. But they have been trying to resolve their differences over how to spread the production cuts.

The path to finding a consensus has been complicated by Saudi Arabia and Iran, whose longstanding mutual enmity includes religious, political and economic competition.

When it comes to oil, Saudi Arabia, the largest producer in OPEC, has wanted to maintain market share. An ambitious Iran has wanted to protect its nascent comeback as a power broker in the cartel, a role it lost in recent years under nuclear sanctions.

By Wednesday morning, oil prices had jumped nearly 7 percent, to about $49 a barrel, on expectations of a deal after expressions of optimism by the Iranian oil minister. Here is what to watch for as oil ministers gather in Vienna to hammer out the final details of an agreement:

Two months ago, the cartel surprised world energy markets by agreeing in principle to trim production by up to 700,000 barrels a day from slightly more than 33 million barrels. The promised cut was small — less than 1 percent of global oil production — and there was no decision on which countries would cut or by how much. But just the promise bolstered oil prices.

The move by OPEC was a significant change of course for Saudi Arabia.

To undercut higher-cost Western players, the powerhouse producer had allowed oil prices to collapse, from more than $100 a barrel to below $30 earlier this year. With its finances coming under increasing pressure, Saudi’s new royal government said it would return to a more traditional effort of managing prices by controlling production.

But Saudi Arabia wants OPEC members to share the cuts. That has been the major sticking point in the negotiations.

Iran is coming back fast.

Since many of the sanctions were lifted in January, Iran’s crude oil production has bounced back by nearly a third to about 3.7 million barrels a day. Having achieved their goal of returning to levels from before the sanctions, Iranian officials want to take production capacity higher still, toward 4.8 million barrels a day by 2021.

Iran wants to maintain its comeback and has been pushing for concessions.

OPEC officials say the atmosphere between the two big players’ oil ministers has improved in recent months, and on Wednesday they appeared to be edging closer together. “The principle is they don’t have to cut,” Khalid al-Falih, the Saudi energy minister, told reporters on Wednesday, referring to Iran.

A failure to reach a deal will most likely send prices sinking. If a consensus is reached, the effect on the market will depend on whether the deal has any teeth.

Analysts say announced cuts will most likely lift prices — at least for a while. “A cut does matter,” said Roger Diwan, an analyst observing the Vienna meeting who advises financial firms for IHSMarkit. “The fundamentals that would have been ugly will start looking better.”

But the long-term situation will depend on a number of factors.

Even as Saudi Arabia and Iran have vocally supported higher prices, their national oil companies have been making deals in Asia and filling tankers as quickly as they can. Saudi production has increased to well over 10 million barrels a day, while reductions in domestic consumption have left more available for export. Iran, relieved of nuclear sanctions, has gone on its own selling spree in India, while starting production in new oil and gas fields. Other OPEC countries have followed, increasing production in recent months.

The intense competition means OPEC’s new plan could prove less meaningful. The size of any cut is likely to be insignificant in a global marketplace that remains oversupplied. Higher oil prices may bring on new oil from the United States. And, if history is any guide, even a modest agreement is likely to be breached by cheating.