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OPEC has injected a heightened level of drama into its negotiations for a production deal, but if the talks fail this time, oil prices could collapse, and the cartel will have an even more difficult time getting the price back up.
Analysts say the producing nations face higher stakes this time than at the April meeting in Doha, or the September meeting in Algiers. If there is a deal, it would reverse a 2-year-old failed policy of letting the market set prices, which has resulted in producers pumping even more oil into a steep price slump.
"It's not so easy for them to walk away now. The problem for all of these countries is if you don't get it done on Wednesday, you can't jawbone this market any more. You're done. You're going to need to find a new trick next year," said Helima Croft, head of global commodities strategy at RBC.
The rise and fall in oil prices this year can be tied closely to OPEC promises and then failure to reach a production accord. The slow lead-up to this week's meeting in Vienna has been punctuated by plenty of comments of support for a deal since the ministers last met in Algiers. But this weekend, that reversed when Saudi Energy Minister Khalid al-Falih reportedly said the market could rebalance on its own, and he questioned the need for a deal.
Croft said it's still more likely than not that a deal will get done, but if it doesn't, prices will drop quickly and sharply.
"We think it's binary. We think it tests $40 if there's no deal, $50 if there is a deal, " she said. Oil prices seesawed after the talks looked doomed to fail this weekend, but futures rebounded after Iraq's oil minister said he was optimistic for an accord and that his country will cooperate with other members. West Texas Intermediate crude futures settled at $47.08 per barrel Monday, after dipping to about $45.
Barclays strategist Michael Cohen also expects OPEC and other producers to eke out a deal.
"It will still be face-saving. To us it doesn't seem like the comments over the weekend from Khalid al-Falih or the optimistic comments from the minister from Iraq really changed our view. I think the days in which we could really expect significant production or output changes from a meeting like the one on Wednesday are likely behind us. What we've said for a long time is the OPEC countries are going to do what they're going to do anyway. If they can put a gift wrap over it and say this is our cut deal or freeze deal, that's what they'll do," said Cohen, head of energy commodities research.
"Remember these are politicians. They want to protect the downside; if they can find a way to save face and kick the can to February or March, they're going to do it."
Cohen said OPEC is under even more pressure to get a deal done now than when it last met.
"Three things have changed since Algiers. One is Trump was elected. Two, the earnings season showed U.S. oil producers were more resilient, and the third is the return of output from Libya and Nigeria," said Cohen.
Analysts say U.S. President-elect Donald Trump is a wild card for the oil market longer term, in more than one way. He has said he would make it easier for U.S. producers to drill by removing regulations and opening more federal land for development. Trump also supports the Keystone pipeline from Canada to the United States. All of those things could bring more oil onto an already oversupplied market.
An OPEC deal could also result in bringing on more competition from the U.S. if it triggers a jump in oil prices.
"If you get a big price reaction to the upside, it's not going to be overnight, but shale production stands to make a bigger impact next year," said Cohen. He said he is not changing his view and remains constructive on oil prices for 2017. "Something's got to give here, and the recipe for Saudi Arabia and Iran to come to the table and put something together is getting more difficult. We should all prepare for big oil price gyrations in the next few days."
A major sticking point is reportedly that Iran and Russia have said they do not want to reduce production, and Iran, on Saturday, said it was negotiating an exemption from the cut. Russia is not a member of OPEC, and while it has supported the talks, it has not said it would join in if the cartel pares back on output.
The effort to reach a deal in April in Doha fell apart when Iran refused to freeze production and Saudi Arabia refused a freeze — which means maintaining production levels, rather than increasing or decreasing them — unless all members went along with it. Now the producers are all pumping at higher levels, and the talk has switched from a freeze to an actual reduction in output.
Saudi Arabia reportedly was pushing for the steepest cuts possible, which would take 2 percent of the world's output off the market, according to The Wall Street Journal. That would result in a production ceiling of 32.5 million barrels a day, more than 1.1 million barrels a day below OPEC's October output, the Journal reported.
"Part of the game plan here for the Saudis is to bring everybody to their knees and have them crawl back to the bargaining table. It looks like (Iraq) might have buckled. We'll have to see the real thing; with Iraq, it's the math is fuzzy," said John Kilduff, founding partner of Again Capital. "What might be a cut for them might not be a cut in anyone else's eyes."
Iranian officials have said they want to produce about 4 million barrels a day, and the country has rebuilt its industry since sanctions were lifted a year ago, to where it says it is pumping 3.9 million barrels a day. Other reports put its production at about 3.7 million barrels. Trump could reopen the topic of Iran's nuclear deal, and sanction the country once more.
"I think it's a reason for Iran in particular, not to do a deal. If they are expecting a revision of the nuclear deal, a re-tightening of the sanctions or even just unilaterally, it's going to make life difficult for them again," said Kilduff.
"You saw the talks break down. The Iranians were accusing the Saudis of reneging on some big promises. I assume they were reneging on Iran being exempt from the cuts," he said. Iran's oil minister Monday said members of OPEC could reach an agreement if they put politics aside.
"If we look at the OPEC meeting from an economic point of view, we can reach an agreement soon to freeze oil output to 32.5 to 33 million barrels per day as decided in Algeria," Bigan Namdar Zanganeh told state television, according to Reuters.
Kilduff said if the meeting fails to end with a deal, the price per barrel will fall into the $30s.
"The price is going to crater," he said. "I think the Saudis are trying to position themselves for a failed meeting with this talk that the market will rebalance anyway. I think what they would say is they're going to revisit it in the spring after northern hemisphere winter peak demand period … If there's failure to come together, I think there's going to be a punishing outcome for some time."
Croft said Iran is close to its current peak level of production and would not be able to really increase it.
"Everyone is just digging in," she said. "They're certainly injecting a lot of drama into this. ... The only way to get a deal is to exempt Iran and get it done ... Iran is not going to be producing 4 million barrels a day in 2017. Iran is basically tapped out at this point."
Cohen said the talks are most likely to come down to the wire and the ministers may decide when they sit down together on Wednesday.
"Everything is posturing before Nov. 30, every minister is going to be there talking their own book. There's nothing else; everything else is speculation until all those ministers are in a room on Nov. 30, and they have their options laid out before them," Cohen said.