Saudi Arabia sets high bar for Opec supply deal

Saudi Arabia has set a high bar for any oil supply deal ahead of Wednesday’s Opec meeting in Vienna, as it attempts to put pressure on regional rivals Iran and Iraq to accept a larger share of output cuts.

The oil production cartel is trying to reach an agreement to curb supplies for the first time since the financial crisis and put an end to a two-year downturn in crude prices that has battered the economies of its members.

Saudi Arabia, the group’s de facto leader, has offered to cut 4.5 per cent from its production levels of about 10.5m b/d in October, according to two people familiar with its thinking.

But in turn, Iran must freeze its production at about 3.8m b/d, while all members must accept the use of third-party production figures published by Opec, the people said. On top of that there must also be participation from producers outside the group, such as Russia.

Iran, however, argues that only those countries that have ramped up production over the past two years — Saudi Arabia and its Gulf allies — should cut back now.

Saudi Arabia’s hardline stance risks a further drop in prices, which traders have warned could fall by almost a quarter should a deal to curb output not materialise after nine months of talks between the 14-member cartel.

Brent crude oil, the international marker, rebounded from an early drop to $48.28 and was up $1.02 at $47.24 a barrel in afternoon trading. The rebound came after Iraq’s oil minister Jabar Ali al-Luaibi he was “optimistic” of reaching a deal on Wednesday.

“We will co-operate with Opec members,” he said.

While some analysts see the tough Saudi line as brinkmanship ahead of the ministerial meeting, the world’s biggest oil exporter has appeared less desperate to clinch a deal in recent days.

“The market will reach balance in 2017 even if there is no intervention by Opec,” said Khalid Al Falih, Saudi Arabia’s energy minister, on Sunday. “I think maintaining production at current levels is justifiable.”

Saudi Arabia also decided not to attend a meeting with non-Opec countries, which was scheduled for Monday, until the cartel itself had reached a deal.

Opec is meeting in Vienna to try to finalise a preliminary deal agreed in Algiers two months ago that would reduce its production to between 32.5m and 33m barrels a day and help mop up a persistent supply glut. The stakes are high. A failure to reach a deal could see crude oil fall below $40 a barrel.

“One thing few, if any, analysts will disagree with is that if Opec does not come up with a credible agreement to cut production on Wednesday oil prices will end the year below $40 and be chasing down $30 early next year,” said David Hufton of PVM, a London-based oil brokerage.

Mr Hufton’s view echoed that of Torbjorn Tornqvist, chief executive of oil trader Gunvor Group, who told the Financial Times prices could drop by $10 a barrel without a deal.

How the production curbs will be distributed has dragged out between Opec members, with no concrete agreement yet reached. A last-minute diplomatic push is still under way with Algeria and Venezuela seeking to bridge any differences. An output target of 32.5m b/d would require a supply cut of 1.3m b/d.

Iran, which is recovering from years of western sanctions, believes the Algiers accord laid out the case for the country to be exempt from any production deal in the same manner as conflict-ridden Nigeria and Libya. It is targeting production of at least 4m b/d.

“Saudis seem to have reneged on earlier promises,” Iran said through its state-news agency Mehr on Sunday.

While Saudi Arabia believes Iran should be shown some flexibility, it still wants its regional rival involved in any deal. As such, the kingdom is supporting a proposal for Iran to take its highest production between 2002 and 2016 and reduce it by 4.5 per cent, which would hit 3.8m b/d. To put that figure in context, Iran produced 3.72m/b of crude oil in October, according to secondary sources quoted by Opec.

Iran argues only those countries that have ramped up production over the past two years, since Saudi Arabia led Opec into a market share war with rivals, should cut back now.

Saudi Arabia and other Gulf producers have accelerated output to record levels in the last two years.

“Iran had played no part in creating the overhang of supplies that have built up after November 2014, so why should we contribute to any production cut,” said one person familiar with Iran’s position.

Iraq, meanwhile, has reluctantly said it will be part of any deal but it has disputed the underlying figures from which any output curbs will be calculated.

But even if Opec came to an agreement, Saudi Arabia has told members that any cut in production must be conditional on participation from producers outside the group, such as Russia, the people familiar with Saudi policy-making said.

Moscow has offered to freeze its output if Opec reached a deal.

Additional reporting by Neil Hume