Crude oil prices are slumping and dragging global stock markets sharply lower Monday after a much-hyped meeting of the world’s biggest oil producers failed to produce an agreement on restraining output to tackle the glut on world markets.
The meeting foundered on a problem that had been obvious all along: Iran, which is trying to revive its output as fast as possible to pre-sanctions levels, refused to go along with the pledge by Saudi Arabia, Russia and other major producers to freeze output at January’s levels. As a result, Saudi Arabia withdrew from the agreement (as it had always threatened to do, failing Iranian participation), putting the global oil market back where it was at the start of the year–in a free-for-all which is hitting all producers hard, but some harder than others.
By mid-morning in Europe, the benchmark West Texas Intermediate blend was trading at $40.39, having hit a 2016 high of $42.17 last week in anticipation of a deal.
Crude prices had fall as much as 7% in electronic trading over the weekend, but recovered slightly on Monday morning on news of a strike by oil workers in the Gulf state of Kuwait. That could affect over 1.6 million barrels of oil a day of current output, relieving some of the downward pressure on prices. Traders now have to balance the actual impact of the Kuwait strike and the slow decline of U.S. shale production against the prospect of Russia and Gulf producers ramping up output still further. The International Energy Agency estimated last week that the world market will be oversupplied by an average of 1.5 million barrels a day in the first half of the year, but that rising demand and falling U.S. output would reduce the imbalance to 200,000 b/d by the end of the year. That calculation now hangs very much in the balance.
News of the meeting’s failure had an immediate impact on the markets of oil-producing countries, with the Russian ruble falling over 1.5% against the dollar, and Russia’s stock market falling 3%. The Japanese and Chinese stock markets both lost over 1%, while the Euro Stoxx 50 index lost 0.4%.
One notable outrider, however, was Brazil, where domestic political events have wrenched markets away from moving in sync with the oil price. Both the real and the futures contract on the benchmark Bovespa stock index soared in reaction to the news that Congress had voted to begin impeachment proceedings against President Dilma Rousseff. Markets have lost faith in the populist policies of the left-leaning President, which have driven the country into a second year of recession, and are hoping that her removal will lead to a change in policy course. At 0400 ET, the Bovespa futures contract was the biggest gainer of all global stock indexes, up 1.2%, while the real was up 0.6% from its pre-weekend close.