OPEC officials emerged from six plus hours of meetings in Algiers announcing with great fanfare that they have reached consensus that the oil cartel’s total production needs to be cut back to between 32.5 million and 33 million bpd, which translates into an output cut of as much as 750,000 bpd.
*** While the announcement is only of an “understanding” with many details still to be worked out, the Algiers OPEC consensus should lend further momentum to the crucial back channel negotiations between Saudi Arabia and Russia — and Iran — that we wrote about last week (SGH 9/23/16, “OPEC: Towards a November Output Deal”) to firm up a shift to a quota-based agreement that would include output cuts as soon as the November OPEC Summit in Vienna. ***
*** We understand the Kingdom will be willing to trim output by at least 450,000 bpd from current record levels of 10.6 million bpd, which along with cuts by Kuwait, the United Arab Emirates, and Iraq, would constitute the bulk of the output cuts the OPEC members were discussing in Algiers. But again, it will be wholly dependent on a Russian observation of its own implicit quota and an Iranian adherence to a final quota still to be negotiated. ***
Cracks Along the Way
The work to finalize an OPEC/Russia output agreement to re-balance crude supply to what is hoped to be a rising demand next year will now fall to an OPEC technical committee. It will begin work next week to study new quota allocations and how and which member countries would agree to trims from what are record current levels of output. Their proposals would then be presented at the full ministerial “decision-making” meeting in Vienna.
As much progress as there was in Algiers — probably more than the OPEC ministers in fact expected — the upbeat messaging coming out of the meeting is invariably understating how much detail still needs to be negotiated. In other words, there is likely to be “cracks along the way” in the consensus reached today.
Indeed, while Iranian oil minister Bijan Zanganeh joined his Saudi counterpart Khaled al-Falih in extolling agreement on the new output consensus, any finalized deal by November may still require major concessions by Tehran.
The Saudis remain adamant that while Iran is under its overall pre-sanction levels, its actual crude exports are already at the pre-sanction levels, and which therefore has to be factored into a new quota that would perhaps only lift Iran’s new quota to just over 3.7 million bpd from a current 3.65 million, or well short of its vowed 4 million plus pre-sanctions target output.
After the debacle in Doha last spring when an output “freeze” collapsed amid heated Saudi-Iranian rivalry (see SGH 4/17/16, “Oil: Doha Collapse”), Russian President Vladimir Putin apparently told Saudi Deputy Crown Prince Mohammed bin Salman in their meeting on the sidelines of the G20 meeting in early September that Russia would only consider joining any output agreement after “all” OPEC members had locked down the new quota levels, and implicitly, an understanding the Kingdom would trim its own record output levels.
Russia itself has achieved its own record output levels of about 11.1million bpd, and it is assumed it would too agree to an implicit quota that would be under those levels. The Russian oil sector is at or just beyond its maximum sustainable output, and Saudi Arabia has agreed to commit via its Public Investment Fund as much as $20 billion in new investments in the Russian energy sector.