Crude oil plunged on Tuesday, as market participants began to lose hope that OPEC can reach a deal to cut production in the next 24 hours.
Brent crude futures fell $1.81, or 3.8%, to $46.43 a barrel AT 5:00 pm ET, a two-week low. The January contract for US West Texas Intermediate (WTI) declined $1.85, or 3.9%, to $45.23 a barrel, wiping out last week’s gain.
Members of the Organization of the Petroleum Exporting Countries (OPEC) gathered in Vienna ahead of Wednesday’s formal meeting, where it became increasingly clear that key divisions remain. Officials from Indonesia and Iran expressed reluctance to agree on a production cut, raising fresh worries about another failed summit.
The cartel reached a tentative deal to freeze production back in September, but has failed to build consensus ahead of the November 30 meeting. Even if a deal is reached at the eleventh hour, it likely wouldn’t amount to a substantial shift in the global supply-demand balance over the long-term. OPEC’s 14 members pumped a record 33.64 million barrels per day in October. A short-term spike in prices resulting from an output deal would likely encourage greater production from non-OPEC producers, especially US shale oil.
The market is pricing in a 30% probability the producer group will reach a deal on Wednesday, according to analysts at Goldman Sachs. The oil market is experiencing extreme volatility compared to a week ago, with investors increasing their bearish bets on the energy commodity.
However, hopes for a deal aren’t completely dashed. Most experts agree Saudi Arabia wants to rebalance the market, and may be willing to offer flexibility to Iran and other OPEC members that have called for more leniency. The delay also allows non-OPEC members such as Russia avoid agreeing to a production deal before the formal meeting begins.
Russia has committed to freezing production at 11.2 million barrels per day. Moscow says this essentially amounts to a reduction because it planned to raise output in 2017.
The American Petroleum Institute on Tuesday said crude inventories declined by 717,000 barrels in the latest week, following a nearly 1.3 million-barrel drop during the previous period.
Brent Crude Futures (January 2017)