Oil prices have plummeted after a meeting of Opec countries failed to come to an agreement on an output cap.
The cost of Brent crude fell by as much as 7% at one stage, following the outcome of the talks, but then regained some ground to reach $41.23 per barrel- representing a total fall of 4.3%.
The meeting, which was held in Qatar, was attended by Saudi Arabia and the majority of the other Opec countries. However, Iran did not send a delegation.
It is understood that Saudi Arabia, currently the world’s largest exporter of oil, had been prepared to agree to an output cap if all the other Opec nations had agreed.
Iran has made it clear that it will continue to increase its output until it reaches the production levels that were seen before the implementation of far-reaching international sanctions.
The Iranian government said:
“As we’re not going to sign anything, and as we’re not part of the decision to freeze output, we ultimately decided it was not necessary to send a representative.”
Following extensive talks in Qatar, Mohammed bin Saleh al-Sada, the country’s energy minister said that the oil producing countries needed “more time”.
“We of course respect [Iran’s] position… The freeze could be more effective definitely if major producers, be it from Opec members like Iran and others, as well as non-Opec members, are included in the freeze.”
Brent oil was not the only one to take a price hit after this revelation, US crude oil saw its price drop by around 7% before recovering to reach $38.48 per barrel.
Andrew Walker, the economics correspondent for BBC World Service, believes that the breakdown of talks signals tough times ahead for many oil producing nations- many of whom had already been hit hard by the continued fall in prices.
“The failure to agree a freeze is not going to help oil exporters desperate to see the price of crude oil rise. They are hurting. Even Saudi Arabia – despite having significant financial buffers – is overhauling its public finances and trying to diversify its economy away from oil.”
Walker is alluding to the recent announcement, made by the crown prince of Saudi Arabia, that the kingdom is preparing to open up its state-owned oil company to private investment. It is believed that the first IPO could happen as soon as 2017. If the Saudis were to float Aramco, it would be worth somewhere between $1-10 trillion.
Mr Walker goes on to say:
“Other major oil producers are finding life even harder. One Opec member, Angola, has even gone to the International Monetary Fund seeking to negotiate financial assistance.
“There is, perhaps, some compensation for the countries at the Doha meeting in that their failure to agree to curtail supply increases is likely to renew the pressure on shale oil producers in the US, who were not and never would be represented at a gathering such as this.
“The rise of the American shale industry in the last decade or so is one of the main reasons why global supplies are so plentiful and why prices are now less than half what they were in mid-2014.”
Despite most of Opec being present, the talks were not officially an Opec event.
Opec have not reacted particularly quickly to the large drop in oil prices that have come about since the most recent peak of $115 a barrel back in 2014.
Oil prices had made some gains in recent weeks amid speculation that such a export cap was on the table.
Chief oil analyst at Energy Aspects, Amrita Sen, said that markets had been “rebalancing” even ahead of the deal being reached.
“Production is falling everywhere because of low prices so the freeze actually wouldn’t really matter for the markets because people are already producing at maximum levels and production is anyway gradually falling with or without the freeze deal,” she said.
“But for sentiment it has a huge impact because at he moment these guys aren’t even able to talk and come to an agreement.”
When trading started in London, the FTSE 100 fell by 1% before recovering slightly, the big oil companies saw the greatest fall- BP and Shell down 2.4 and 3% respectively.
Investment director at AJ Bell, Russ Mould, said:
“BP and Shell were early and inevitable casualties as investors reacted to the fall in oil prices following the failure by oil exporting countries to reach an agreement on output.
“The fall in oil prices is sparking profit-taking as a marked slide in crude raises the question of whether BP and Shell will be able to maintain their dividend payments if oil remains lower for longer.”