OPEC Meets to Discuss First Oil-Output Curbs in Two Years

  • Algiers meeting comes as IEA says market outlook is worsening
  • Producer group has pumped without limits for two years

Oil Surges as OPEC Said to Agree on Oil Output Cut

OPEC ministers are meeting in Algiers with the group’s two leading members, Iran and Saudi Arabia, ready to discuss the first limits on oil production in two years.

While no formal decision is expected Wednesday, the Saudi Arabian and Iranian ministers signaled they want to lay the groundwork for an agreement at the group’s next meeting in Vienna. That would end the produce-at-will strategy the Saudis instigated in 2014, upending the oil market and shaking investors, corporations and entire economies.

“It’s not a decision-making meeting, but after all I think big steps will be taken today,” Iran Minister Bijan Namdar Zanganeh, told reporters in Algiers on Wednesday before the meeting started.

His Saudi counterpart Khalid Al-Falih, who inherited a chronically oversupplied oil market when he was appointed energy minister in April, on Tuesday had already softened his country’s stance toward Iran other countries who want to restore production. Iran’s insistence on increasing output to levels before sanctions were imposed on oil its exports prompted Saudi Arabia to block an earlier attempt at a producer accord in Qatar in April.

"The gap between OPEC countries is narrowing in terms of what are the levels at which we will freeze," Al-Falih said on Tuesday. "The opinions are getting very, very close together."

Iran and Saudi Arabia face significant hurdles as both nations have yet to agree on their respective new production targets. If they kick a final decision forward until the next meeting in Vienna on Nov. 30, they will have two months to resolve differences and prevent another year of oversupply on the oil market. Still, OPEC must leave Algiers with a convincing message because the need to rebalance the market is growing more urgent, Qatar’s Energy and Industry Minister Mohammed Al Sada said as the meeting started.

The stakes are high. The International Energy Agency this week predicted a worsening oil market if OPEC doesn’t act.

Oil prices, which dropped 3 percent in London on Tuesday, rebounded on Wednesday. Brent futures rose 1.5 percent to $46.67 a barrel at 3:24 p.m. London time.

The mere fact there are numbers on the table before OPEC’s formal meeting in Vienna shows that Saudi Arabia and Iran are closer to a deal than any time in the last two years. While Tehran wants to set its production target at about 4 million barrels per day, Riyadh last week asked its regional rival to freeze its output at 3.6 million barrels per day in return for a production cut.

Al-Falih acknowledged that Iranian oil output has been constrained until now, yet he also said that any increase should not surpass "levels that they have achieved recently."

Middle East Politics

At stake isn’t just current oil output levels, but a mix of Middle East politics and domestic pride that have over decades made the allocation of individual ceilings for each member of the Organization of Petroleum Exporting Countries the most difficult issue the group has to deal with. OPEC has needed many months of behind-the-scenes diplomatic talks to resolve previous battles.

"There definitely seems to be a bigger push towards achieving some co-ordination amongst members this time around, so even if there is no concrete deal in Algeria, this isn’t over yet," said Amrita Sen at consultant Energy Aspects Ltd. in London. "The door remains open for further negotiations and a possible deal at the Nov. 30 OPEC meeting in Vienna."

Whether Saudi Arabia and Iran can strike a deal will determine the fate of the oil market and industry in 2017. IEA Executive Director Fatih Birol said on Tuesday that oil supply will exceed demand until late next year unless there’s a “major intervention.”

If OPEC finds common ground in Algiers, it can reach a consensus with all oil producers, said Algerian Energy Minister Noureddine Boutarfa.

Russia is willing to freeze output, ideally at September levels, the country’s Energy Minister Alexander Novak said Tuesday. The world’s largest energy exporter is on course to pump a post-Soviet record amount of oil in September, adding as much as 400,000 barrels a day to the country’s production.

Material Difference

To make a material difference to the market, OPEC will have to reduce rather than cap production, according to Ian Taylor, the chief executive officer of Vitol Group, the world’s largest independent oil trader.

The organization may need to tighten supply further to drive up prices, a task that could be “too much to grasp at this particular meeting,” he said.

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Still, the history of OPEC shows why returning to individual production ceilings is likely to prove arduous, even if most countries signal their desire to reach a deal to end the downturn.

The oil producers’ club hasn’t published individual targets for its members since October 2006, when the organization set a quota for Iran of 4.1 million barrels and one for Saudi Arabia of 9.1 million barrels. A decade later, Riyadh is offering a deal that, in effect, would give official stamp to its current production of more than 10 million barrels, while forcing Tehran to accept a target below 4 million barrels.

"None of the current scenarios seem plausible," said Seth Kleinman, an oil analyst at Citigroup Inc. in London, adding that Saudi Arabia and Iran are discussing what amounts to a direct trade-off between their own market shares.

"Trying to sell this to the domestic governments, monarchies and leaders of both nations would likely prove almost impossible," he said in a note to clients.

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