Oil prices rallied Thursday as oil ministers at a meeting of the OPEC oil cartel in Vienna were uncharacteristically united about the prospect of continuing production cuts that have helped push prices up more than 20 per cent this year.
At the meeting earlier this year, leaders from the notoriously fractious cartel agreed to cut production by 1.8 million barrels a day, to push up prices. At the time, oil was struggling to keep its head above $50 US a barrel, and the oil-producing nations of OPEC realized they themselves were collateral damage in their war to push U.S. shale producers out of the market by flooding the market with cheap oil.
The cut was designed to limit supply and push prices up to a level that OPEC member nations were more comfortable with. But the group faced a classic prisoner’s dilemma — turning off the taps was good for everyone in the group, but as prices rose, the incentive for individual members to cheat and ship out oil on the sly went up.
The original nine-month deal to cut supply is set to expire in March 2018. Thursday’s meeting is in large part to discuss extending it and while the meeting hasn’t finished yet, OPEC nations are sounding more united than they usually do about working together. Even bitter rivals Saudi Arabia and Iran appeared on the same page.
“My preference is to go for [another] nine-month extension,” Khalid Al-Falih of Saudi Arabia told reporters, while Bijan Namdar Zanganeh, his Iranian counterpart, said the meeting will “reach agreement about rolling over” the supply cuts.
Oil prices rallied on the news, with a barrel of West Texas Intermediate gaining more than 50 cents to trade at $57.76 in New York early Thursday.
The Saudis favour continued cuts, but Iran wants greater market share over the longer term as it claws back from the effect of more than a decade or sanctions that were lifted as part of its 2015 nuclear deal with six world powers. Now pumping below four million barrels a day, Iran has said it wants to add another one million barrels within three years.
OPEC may be singing from the same songbook, but the X factor at the meeting is Russia. While not an OPEC member, Russia had been working with the cartel to support the price of oil, as OPEC and the Russian economy — which is also heavily dependent on energy prices — share a common enemy: U.S. producers.
“Russia is the elephant in the room,” economist Todd Hirsch told CBC News in an interview. “They have not been as cooperative when it comes to supply cuts.”
The mood in Vienna from OPEC nations may be co-operative, but “indications re that Putin isn’t quite as willing to play nicely in the sandbox with the other OPEC nations,” Hirsch said.
“And if Russia doesn’t cooperate,” he said, “what’s the point.”