(Bloomberg) -- Saudi Arabia is offering fellow OPEC+ members a quid pro quo: If you stop cheating, we’ll curb production.
With just hours to go before the Organization of Petroleum Exporting Countries’ meeting in Vienna, it was unclear if the kingdom was simply offering to return to its average output for 2019 -- ending a brief surge to compensate for the September attacks on its oil facilities -- or whether it was willing to take even more oil off a market that’s looking oversupplied in early 2020.
What was becoming clear, according to OPEC delegates, was new Saudi Oil Minister Prince Abdulaziz bin Salman’s reluctance to endorse the status quo, in which countries including Iraq, Nigeria and Russia have consistently failed to implement their pledged output cuts, leaving the kingdom carrying most of the burden of supporting crude prices.
“The kingdom has explicitly communicated to OPEC that it will no longer tolerate under-compliance,” said Amrita Sen, chief oil analyst at Energy Aspects Ltd. “If it continues, Saudi Arabia can easily return to producing at or above its current quota.”
The outcome of the meeting remained in the balance on Thursday as OPEC officials shuttled between sit-downs in the suites of luxury hotels. Iraq, the country with the poorest track record complying with the pact, had been the main advocate for a deeper cut of about 400,000 barrels a day, but later on Wednesday the minister said instead he favored an extension of the current accord until the end of 2020.
For the oil market, a new deal could be a psychological boost as traders fret about possible oversupply next year, but may take relatively few barrels out of the physical market. Saudi Arabia has already been pumping significantly below its official OPEC level, and few are likely to believe that nations such as Iraq, Nigeria or even Russia, which haven’t complied with the deal so far this year, are about to start.
Crude prices jumped 4.2% in New York on Wednesday, the biggest gain since September. West Texas Intermediate crude was little changed at $58.42 a barrel as of 5:36 a.m. local time on Thursday.
Click here for an explanation of why a deeper OPEC+ cut would not be quite what it seems.
The so-called OPEC+ alliance has an agreement to reduce output by about 1.2 million barrels a day since the start of the year in order to eliminate a surplus and bolster crude prices. That deal expires at the end of March, right in the middle of what looks to be a tricky patch for the oil market. Demand growth is slowing and another bigexpansion in rival production is coming down the pipeline.
Together those factors could create another oversupply that drives international prices back down toward $50 a barrel. That’s too low for most OPEC members to balance their budgets, and would make an unfortunate epilogue for the record-breaking initial public offering of Saudi Arabia’s state oil company, Aramco.
Iraq’s status as an unlikely advocate for deeper cuts -- it has actually increased production since last year’s agreement -- prompted some skepticism about whether a genuine supply reduction was imminent.
“As is often the case with OPEC, one has to incorporate a fair degree of psephology to see what’s going on behind the headlines,” analysts at Redburn said in a note. The additional 400,000 barrel-a-day reduction proposed by Iraq “would actually leave physical production broadly unchanged” because the group is already pumping less than its official target.
Prince Abdulaziz offered little clarity. He declined to answer specific questions when he arrived in Vienna on Wednesday, saying simply that the market outlook was “sunny” like the weather. On Thursday, he told reporters he felt good about the meeting. Ministers from the United Arab Emirates and Kuwait, the kingdom’s closest allies, also had little to say.
On Thursday, Nigeria’s Minister of State for Petroleum Resources Timipre Sylva said OPEC would discuss the possibility of further cuts and it would be a “tough decision.” Iran, which is exempt from making cuts because of U.S. sanctions, will support any decision by the other members of the group, Oil Minister Bijan Namdar Zanganeh told reporters.
“Our balances say OPEC don’t even need to deliver additional cuts, the crude market is incredibly tight,” Sen of Energy Aspects said in a Bloomberg TV interview. “They don’t need to overdo it,” but the market is already pricing in a 400,000 barrel-a-day reduction in the group’s target, she said.