Feature: OPEC scrambles to clinch oil output freeze deal ahead of Vienna meeting

* OPEC freeze talks still in flux
* Iraq, Iran participation unsettled
* Saudis may boost output if deal fails

OPEC meets Wednesday with its credibility on the line, as ministers race against a self-imposed deadline to finalize a long-debated oil output freeze aimed at hastening the market’s rebalancing and shoring up slumping prices.

Details of the freeze pact, first unveiled in Algiers in late September, remain in flux, with various countries — even from outside the producer group — talking up their positions through the media, as they angle for leverage.

Oil prices, which have whipsawed over the last two months, have risen in the past week on reports that OPEC members were apparently narrowing their differences. But close watchers say the stubbornly lingering obstacles — including individual country allocations, exemptions for certain members and which production statistics to use — may yet be a bridge too far.

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«Ultimately, I do believe members are trying to reach a deal, but right now, it’s hard to know what is posturing as part of a negotiating position and what is an absolute red line,» said Yasser Elguindi, a Philadelphia-based analyst with Medley Global Advisors. «Unless the positions staked out so far are negotiable, it’s quite possible that there will not be a deal in Vienna.»

All that has been settled at the moment is what was announced in Algiers: a goal for OPEC to freeze production between 32.5 million b/d to 33 million b/d, which would require a cut of between 640,000 b/d to 1.14 million b/d from October levels, according to the organization’s own estimate. If finalized, it would be OPEC’s first coordinated cut since 2008.

Any deal will have to be based on goodwill and trust, as OPEC has no formal authority to enforce compliance within its own membership, let alone externally among the non-OPEC producers it hopes to engage.

By all accounts, OPEC kingpin Saudi Arabia is eager to seal the freeze to provide some fiscal relief, but all along, it has been insistent that any cut burdens have to be shared equitably and transparently, as it withdraws from its long-standing role as the market’s sole significant swing supplier.

While Saudi Arabia is apparently willing to exempt Libya and Nigeria from the freeze as they recover from internal strife, it has been less amenable to requests from Iraq and Iran for relief.

Iran, which told OPEC it produced 3.92 million b/d in October, has been insistent on its right to regain its pre-sanctions market share of some 4 million b/d before agreeing to output restraints, while Iraq, which said it produced 4.78 million b/d in the month, has said it is entitled to an exemption as it fights the Islamic State on behalf of the world.

Both self-provided figures are far higher than independent estimates, with S&P Global Platts pegging Iran’s October production at 3.67 million b/d and Iraq’s at 4.56 million b/d.

Iraqi prime minister Haider al-Abadi offered some hope for a detente earlier this week, saying his country would be willing to partake in an OPEC-wide cut, though he provided no particulars, and no grand bargain has been announced.

MARKET SHARE BATTLE

A failure to finalize the freeze, after months of talking it up, would prolong not only the market’s supply gut, but also extend the fierce market share battle within OPEC that has seen Saudi Arabia, Iran and Iraq boost output and exports to multi-year highs.

«The Saudis want a real durable deal. If there’s no deal, the Saudis will not cut production,» Matthew Reed, a Washington-based vice president at Middle East consulting firm Foreign Reports, said on a Platts Capitol Crude podcast that will go online Monday. «If this deal were to fail spectacularly now, OPEC would effectively be leaderless, not by any fault of the Saudis, but because they just simply couldn’t herd all these cats together.»

Analysts say oil prices are likely to tumble if OPEC is unable to reach a credible agreement, though there is not as much consensus on how far down they would go, given that the market is already showing signs of rebalancing.

On the other hand, if OPEC clinches a deal and sends prices higher, US shale production is likely to return in full force, limiting the price upside, analysts say. With many of OPEC members’ economies hurting as the oil market enters its third year of malaise, even temporary relief may be welcome.

«A cut to 33 million b/d probably maintains the status quo — slowly returning rigs to active status as prices hover in that $50-$55/b range,» said Tony Starkey, managing director of analysis for S&P Global Platts Bentek in Denver. «If OPEC cuts to 32.5 million/d, then we expect prices to reach $60/b next year which should accelerate, to an extent, the already upward trend in drilling activity here in the US.»

NON-OPEC TALKS

Central to the deal’s success will be the participation of non-OPEC state producers, which is far from certain.

The International Energy Agency in its most recent monthly oil market report raised its 2017 forecast for non-OPEC production growth to nearly 500,000 b/d, with Russia accounting for 190,000 b/d of that.

OPEC will hold a technical meeting Monday in Vienna with several key non-OPEC countries, including Russia, to lobby them to join their efforts.

Russia has only committed to freezing its production at record highs of some 11.2 million b/d, while no other countries have offered any specifics beyond general support for OPEC’s plan. In fact, several non-OPEC producers told OPEC at an October technical meeting in Vienna that they were not in any position to cut output.

Negotiations are continuing over the weekend, with Russian energy minister Alexander Novak set to meet with his Venezuelan counterpart Eulogio del Pino, as well as Kazakh energy minister Kanat Bozymbayev.

Within OPEC, Algerian energy minister Noureddine Bouterfa, who is serving as an intermediary in talks between Saudi Arabia and Iran, sources say, will visit Tehran Saturday to meet Iranian oil minister Bijan Zanganeh.

It will all set up a busy week in Vienna, as ministers hold a last flurry of bilateral and multilateral talks ahead of Wednesday’s formal ministerial meeting.

Many OPEC watchers say that the producer group will be mindful to avoid a repeat of April’s summit in Doha, when a proposal to freeze production at January levels fell apart at the 11th hour over friction between Saudi Arabia and Iran, denting the organization’s reputation.

Whether that yields a durable deal that meaningfully addresses the global supply overhang or a more mealy agreement, such as one that reinstates a collective ceiling but includes no individual country quotas, is to be seen.

«We remain convinced that Saudi Arabia and OPEC President [Mohammed] Barkindo have put their reputation on the line and are fully aware of the implications of failure,» Barclays analysts said in a note. «That is why we continue to believe that we will see a face-saving statement, which shows the organization can still come to an agreement but not veer too far from what countries had planned initially.»

–Herman Wang, herman.wang@spglobal.com
–Edited by James Leech, james.leech@spglobal.com