Global Oil & Gas: Saudis Back Modest OPEC+ Oil Cut

(Bloomberg) — Saudi Arabia proposed a moderate oil-production cut from OPEC and its allies that would nudge the market back into balance, seeking to walk a fine line between preventing a surplus and appeasing U.S. President Donald Trump.

“We in the kingdom are going to be advocating something adequate to balance the market,” Energy Minister Khalid Al-Falih told reporters at the opening session of the group’s meeting in Vienna on Thursday. A cut of about 1 million barrels a day from the whole group should be adequate and “certainly we don’t want to shock the market.”

Events in the Austrian capital weren’t the only story on Thursday. As ministers sat down at the headquarters of the Organization of Petroleum Exporting Countries, Russian Oil Minister Alexander Novak flew to St. Petersburg to meet President Vladimir Putin to decide on their country’s contribution. If the group’s most important ally in the broader OPEC+ coalition decides to make a sizable cut, the cartel will follow up.

Saudi Arabia is equally prepared for a deal or no-deal situation, Al-Falih said. “If everybody is not willing to join and contribute equally, we will wait until they are.”

Oil fell in London after the remarks, tumbling as much as 5.2 percent to $58.36 a barrel, before paring losses to $59.97 at 2:11 p.m. local time. Equity markets also declined as concern resurfaced that trade tensions between the U.S. and China are far from resolved.

Cut Proposal
In one proposal being considered, OPEC could cut its output by 900,000 to 1 million barrels a day and then seek further reductions from non-OPEC partners, according to one delegate, who asked not to be identified as an agreement hasn’t yet been reached. Ministers are working on participation levels for such a proposal before potentially putting it to Russia, the delegate said.

Saudi Arabia, OPEC’s de facto leader, has made clear that it won’t shoulder the burden of trimming production alone. Its cooperation with Russia shows how much OPEC has changed since 2016 when the two countries ended their historic animosity and started to manage the market together. The alliance has transformed OPEC into a duopoly in which Russia, which isn’t a formal member of the cartel but part of the production-cuts alliance, is asserting its power.

While Middle Eastern producers are desperate to reverse the recent slump in prices to pay for government spending, sensitivities are different in Russia, where the government is running a budget surplus and a weak ruble mitigates the impact of lower prices. The government is concerned about the impact of higher prices on Russian consumers, stoking discontent with economic policy, according to one Kremlin official.

Deal Duration
A day of preliminary talks in Vienna on Wednesday concluded with a panel led by Saudi Arabia and Russia recommending an output reduction lasting six months, but the committee didn’t discuss how big any cuts should be. Al-Falih said Thursday his preference was for curbs extending into the third quarter.

The group may agree on a formal cut of under a million barrels a day, Nigeria’s oil minister, Emmanuel Kachikwu, said in a television interview on Thursday morning.

OPEC is also contending with vociferous opposition from the U.S. president, who’s taken to using his Twitter account to berate the group’s policies and sees low oil prices as key to sustaining America’s economic growth.

While ministers met in OPEC’s Vienna headquarters on Wednesday, Trump tweeted that the “world does not want to see, or need, higher oil prices!”

“I’m cautiously optimistic that a deal gets done, but the devil will be in the detail,” said Mohammad Darwazah, a director at Medley Global Advisers. “How OPEC communicates this to the market may be just as important as what gets done.”

Although Russia, the largest producer in the wider group known as OPEC+, has agreed to a cut in principle, the eventual size of their contribution remains undefined and will be key to putting together the final deal.

Sharing the Burden
In private conversations earlier this week, OPEC delegates said that Saudi Arabia had favored a Russian cut of about 300,000 barrels a day, but Moscow was seeking a smaller reduction of about 150,000, said people familiar with those talks. Those differences persisted after Wednesday’s meeting, OPEC delegates said.

Iran is currently subject to U.S. sanctions and as such won’t participate in any curbs, the country’s Oil Minister Bijan Zanganeh said. OPEC ministers are also discussing whether to exempt Libya and Venezuela from making production cuts, a delegate said Thursday.

The last time the OPEC+ group agreed to curtail output, in late 2016, it settled on a combined 1.8 million-barrel-a-day reduction. In preparatory meetings ahead of this week’s summit, delegates had said a cut of as much as 1.3 million barrels a day next year is needed as demand growth slows and U.S. shale production surges.

Resolving the group’s internal differences and convincing a skeptical oil market that they’re serious about preventing a new supply glut in 2019 would require ministers to conclude weeks of debate and settle on a final figure.

“Some countries will struggle because their economies are very constrained” and Nigeria itself could only manage a small cut, Kachikwu said.

–With assistance from Dina Khrennikova, Elena Mazneva, Annmarie Hordern, Alex Longley, Grant Smith, Nayla Razzouk, Golnar Motevalli and Fred Pals.To contact the reporters on this story: Javier Blas in London at jblas3@bloomberg.net ;Salma El Wardany in Cairo at selwardany@bloomberg.net ;Annmarie Hordern in London at ahordern1@bloomberg.net To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net Amanda Jordan, Christopher Sell