By now everyone not living under a rock has heard the Doha talks have collapsed without a deal, but it is hard to overstate how surprising the outcome was to the world of energy analysts and market watchers.

WTI and Brent prices are set to plunge on Monday, reflecting the failure of OPEC to reach a deal, as oil traders had largely baked in the production freeze deal into the price for crude. Oil prices had moved above $40 per barrel in recent weeks, about 50 percent higher than their low point in February when OPEC and Russia originally announced a preliminary agreement to freeze output.

Since the Doha summit was put on the calendar several weeks ago, a production freeze looked all but certain. Even though there were murmurings about certain parties holding out – particularly the Saudis who vowed not to agree to a deal without the participation of Iran – most people thought the comments were bluster. It seemed hard to imagine that OPEC, having been subjected to ridicule and questions about its relevance since the collapse of oil prices a year and a half ago, would put its credibility on the line once again only to come up empty. That was particularly true since the objectives for the Doha meeting were not all that ambitious – a freeze at record levels of production for nearly all parties involved was never going to have a major impact on the global oil supply imbalance. Related: Are We On The Right Track To An Oil Price Recovery?

That meant that OPEC surely would leave Doha with at least a token agreement in hand. But Saudi Arabia held its ground at the last minute and insisted that any deal must include Iran. Iran, of course, was never going to sign up, having just been relieved of several years of sanctions. Iranian officials said as much from the beginning. That makes the Saudi position all the more puzzling. If Saudi Arabia was not going to go along with the freeze deal without Iran, why agree to a meeting in the first place?

One possibility is that Saudi Arabia had at least some intention of signing up to the freeze, but let its antipathy towards Iran get in the way at the last minute. “The fact that Saudi Arabia seems to have blocked the deal is an indicator of how much its oil policy is being driven by the ongoing geopolitical conflict with Iran,” Jason Bordoff, the director of the Center on Global Energy Policy at Columbia University, told Bloomberg.

Another possibility is differences between Saudi officials themselves on how to approach Doha. Doubts over a potential success in Doha surfaced in recent weeks following comments from Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman, who laid out Saudi Arabia’s position not to freeze without Iran following suit. He reiterated those comments three days before the meeting. “If all major producers don’t freeze production, we will not freeze production,” Prince Salman said on April 14. “If we don’t freeze, then we will sell at any opportunity we get.” Much of the world, including many negotiators, again thought that this was bluster. Related: Horizontal Land Rig Count Summary 15th April 2016

The Wall Street Journal hinted at the fact that Saudi Arabia’s delegation to Doha, led by the iconic oil minister Ali al-Naimi, had quite a different tone from the powerful young prince. As late as Saturday, the Saudi delegation appeared to be “willing to sign a deal despite what they described as political statements from Prince Salman,” the WSJ wrote, based on comments from its sources familiar with the talks. On Sunday, al-Naimi unexpectedly backtracked, and the Doha negotiations dragged on for hours before ultimately falling apart. Although it is unclear what caused the change, one would have to wonder if Prince Salman ultimately prevailed over his country’s delegation to take a hard line over Iran.

Ahead of Sunday’s meeting, Bloomberg surveyed 40 oil market watchers and analysts, and half of them expected a successful result from Doha, and half predicted failure. The pessimists turned out to be right.

Thus, oil prices could careen downwards. “This is an extremely bearish scenario and we will probably see a knee-jerk reaction on the market,” Abhishek Deshpande, an oil analyst at Natixis, told The Wall Street Journal. “Prices could touch $30 a barrel within days.” Related: U.S. Oil Industry Fears That New Regulation Could Cost $25B

Russia’s energy minister Alexander Novak expects the oil market will take an additional six months to find a balance because of the collapse of Doha; he now sees the supply overhang disappearing in mid-2017. In an ominous sign for oil prices, Saudi Prince Mohammed bin Salman also said a few days ago that his country had the ability to immediately ramp up production by another 1 million barrels per day to a whopping 11.5 mb/d “if we wanted to.”

Separately, Kuwait’s oil workers could do more for the markets than any OPEC production freeze. While oil traders are focusing on the failed Doha talks, Kuwait’s oil production dropped by half this weekend because of a worker strike. Kuwait Oil Company reported that its oil production fell to a staggering 1.1 mb/d after workers began a strike over wages. Kuwait Petroleum Corp., the state-owned refiner, saw production fall from 930,000 barrels per day to just 520,000 barrels per day on Sunday. Kuwait’s government has ordered its companies to replace striking workers, but it is unclear when production will resume to normal levels.

If Kuwait’s production stays offline for any lengthy period of time, oil traders will quickly forget that OPEC’s Doha summit ended with a disastrous result.

By Nick Cunningham of Oilprice.com

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