Oil prices soared 8.6 per cent to above $50 a barrel on Wednesday after two of Opec’s most powerful members said they were hopeful of reaching the first deal to cut supplies since prices started to plummet two years ago.
Khalid al-Falih, Saudi Arabia’s energy minister, said the cartel, which controls about a third of the world’s oil production, was moving “close” to a deal, as he signalled that he was working to bridge a gap with regional rival Iran.
Iran’s oil minister Bijan Zanganeh said all Opec members were ready to compromise and there was a “framework for a deal”. His tone was notably softer than in recent days. He said the cartel was targeting 1m-1.2m barrels a day of cuts between its 14 members.
By early afternoon in Vienna there appeared to be a broad agreement to cut production to 32.5m b/d, according to one delegate, but the exact distribution of the cuts was still being hammered out with the meeting ongoing.
Iraq, which has disputed its need to cut as the country continues to fight Isis militants, could prove a roadblock to a deal, though it also appears to have given ground.
The ministers were speaking in Vienna where they are meeting to try to reach an agreement to curb production and bring an end to a savage two-year downturn in prices that has shredded the budgets of its members. Any deal would mark a U-turn from a decision made in November 2014 to keep output high to put pressure on rivals.
While Mr Falih sought to manage expectations before the meeting, insisting the oil market was already moving back towards balance without a deal, the kingpin appeared ready to concede some ground to Iran.
Brent crude, the international oil marker, rose 8.6 per cent to $50.62 in afternoon trading in London.
“The pressure is probably too great for them not to reach a deal,” said Jason Schenker of Prestige Economics at the meeting in Vienna. “At the end of this meeting the oil price could have a five handle [trading at or above $50] or a three handle — that’s how big a potential swing we’re talking about.”
In September Opec reached a provisional accord in Algiers to bring its total production down to between 32.5m b/d and 33m b/d from a near record 33.8m b/d at the moment. But two months later, the group has yet to agree on how the cuts will be apportioned.
A deal could help the oil market recover from its longest downturn in a generation, which has hammered the share prices of oil companies and sent big producing countries spiralling downwards into recession.
Saudi Arabia is expected to shoulder the bulk of any production cuts along with its Gulf allies, and Mr Falih on Wednesday said its oil output would take “a big hit”.
In return, the kingdom has asked Iran to curb output at close to 3.7m b/d, although privately it has indicated it may allow a higher level near 3.8m b/d, which is close to its current rate of production, according to third-party assessments used by Opec.
Iran, which is finding its feet after years of western sanctions, initially said it should be exempt like conflict-ridden Nigeria and Libya. Later, however, it softened its stance, saying it would freeze its production closer to 4m b/d. Mr Zanganeh on Wednesday said Iran believed Opec should use so-called secondary sources as the basis of any agreement, a previous point of conflict.
Mr Falih told reporters that, based on Opec estimates, Iranian supply had recovered to pre-sanction levels and a freeze at this level would be well received by other members. “Hopefully this will be the framework,” he said.
Should Opec strike a deal on Wednesday, the Saudi energy minister said he expected Russia and other countries outside the cartel to cut about 600,000 b/d of production. The kingdom believes the co-operation of big producers outside the cartel is necessary for any deal to be effective.
But he also criticised Russia’s public stance that freezing its production, which has climbed to a post Soviet-era high, was acceptable.
“Freezing at an all-time high is not a contribution. [It’s] not a match to what Opec is doing. Our discussion with Russia has been about a cut from non-Opec,” Mr Falih said.
Yasser Elguindi at Medley Global Advisors said: “The comments suggest there is a growing convergence on positions between Saudi Arabia and Iran, which is essential for any deal . . . The big surprise would be a Russian contribution not just to freeze but to join Opec in cuts.”
Asked if Russia was prepared to cut production, Vladimir Putin’s spokesman Dmitry Peskov referred to the president’s call with Iranian president Hassan Rouhani this week. “The conversation touched on various issues of co-operation in oil matters,” Mr Peskov said, according to Interfax.
A person briefed on Russia’s preparations for discussions with Opec said that the government had readied all the necessary mechanisms to implement either a freeze or a cut and discussed this with Russian oil companies.
Pavel Zhdanov, director for capital markets and mergers aacquisitionion at Lukoil, Russia largest privately owned oil producer, told investors on a conference call on Wednesday: “In general the company supports the initiative of major oil producers to do certain steps to stabilise the oil market. Let’s wait and see what the steps look like.”
Algeria’s energy minister, Noureddine Boutarfa, one of the architects of the September accord to reduce output, said he was “99 per cent certain” Opec would reach a deal on Wednesday to cut production but did not provide any specifics.
The ministers held a breakfast meeting ahead of the formal gathering, an unusual step pointing to a last-minute push to improve the atmosphere among the group’s members who have been in disagreement since Algiers.
Abhishek Deshpande, analyst at Natixis, said: “A deal now looks more likely, but there are still obstacles to overcome in the meeting.”
Additional reporting by Jack Farchy in Moscow