By Alex Lawler, Vladimir Soldatkin and Ahmad Ghaddar
VIENNA (Reuters) - OPEC and Russia are heading towards prolonging their oil supply cuts for the whole of 2018 but with an option to review the deal in June, OPEC sources said on Tuesday after Moscow expressed concerns the market could overheat.
The recommendation was made by a joint committee of OPEC and non-OPEC delegates including Russia but has yet to be approved by the ministers from the committee on Wednesday and then by a full OPEC meeting on Thursday, two OPEC sources said.
Oil prices deepened their two-day decline on the news, which the market could perceive as an extension of production cuts by just three months until June 2018 rather than a full year.
The Organization of the Petroleum Exporting Countries, Russia and nine other producers are cutting crude output by about 1.8 million barrels per day until March 2018, and on Thursday their oil ministers will discuss extending the deal.
"It will not be an easy meeting and we always look at various scenarios," United Arab Emirates Energy Minister Suhail bin Mohammed al-Mazroui said on Tuesday in Dubai. Upon arrival in Vienna, he said cutting output through the whole of 2018 was still the main scenario but not the only one.
The market had largely expected OPEC to prolong the cuts until the end of 2018 to prop up prices and clear an excess of global stocks, but doubts have emerged in the last few days.
OPEC's leader, Saudi Arabia, has signalled that it wants oil to trade at about $60 a barrel as the kingdom prepares to list shares in national oil champion Aramco and fights a large fiscal deficit.
The Russian government also wants high oil prices ahead of a presidential election in March 2018. But officials in Moscow have voiced worries about pricier oil boosting the rouble, which could undermine the competitiveness of Russia's economy.
U.S. producers aggressively hedged their future production as oil recently rallied (LCOc1), raising fears of another spike in shale output in the United States, which is not participating in the global production curbs.
"Russia is on board for the extension," one of the OPEC sources said following the committee meeting.
Goldman Sachs (NYSE:GS), one of the most active banks in commodity trading and oil producer hedging, said on Tuesday in a note the outcome of the OPEC meeting was uncertain as Brent oil had risen above $63 per barrel.
"The push for a nine-month extension, four months before the cuts end and given an accelerating rebalancing further stands in the face of prior comments that the cuts should remain data-dependent to assess their effectiveness," the U.S. bank said.
Citi, one of Goldman's main rivals, said it expected major producers to end production cuts sooner rather than later.
"OPEC and Russia will both realise they are losing market share and they will be better off going back to a more competitive environment," the head of commodity research at Citi, Ed Morse, told Reuters.
GRADUAL OUTPUT BOOST
Goldman said oil might fall further this week as the market had priced in a nine-month extension.
"We continue to expect a gradual ramp up in OPEC and Russian production from April onward," Goldman said, adding "as a result, the announcement of an only six-month extension would still initially appear bullish relative to our expectation".
On Friday, Russia said it was ready to support extending the output-cutting deal but had still to decide on the duration.
On Monday, Reuters reported that a major Russian production project led by Exxon Mobil (N:XOM) was preparing to ramp up output by a quarter from next year.
The project is not subject to the global output-cutting deal but the development would signal an obstacle to Russia's efforts on production curtailment.
The Exxon project involves Rosneft, the Kremlin-owned state producer whose boss Igor Sechin, a close ally of President Vladimir Putin, has long been a critic of Moscow's deal with the 14-country OPEC.
Sources close to talks between OPEC and Russia told Reuters Moscow wanted to fine-tune the language of the deal to include an option to review the agreement if global stocks fell steeply.
The supply pact is aimed at reducing oil stocks in industrialised countries to their five-year average. The latest figures suggest OPEC is more than halfway there, with OPEC sources saying the target could be reached after June 2018.