Opec-Plus: Production Cut Talks Come to the Fore

Copyright © 2023 Energy Intelligence Group All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited.

Signs were mounting Saturday that Opec-plus may move to cut oil output again as key producers began to gather in Vienna ahead of Sunday's closely-watched ministerial meeting that will try to find the right message for what has been a tumultuous oil market.

Continued price weakness, which has seen dated Brent crude prices average just over $75 in the month of May, has left ministers mulling a number of options to inject more confidence into the market, which analysts say is tricky as fundamentals appear to be disjoined from sentiment.

Energy Intelligence understands a host of options are under discussion ranging from a significant additional cut through to keeping current policy wholly intact.

Sources close to the US government told Energy Intelligence that Washington was not looking for any specific action by the group, even if that included further production cuts.

This would mark a departure from October 2022, when the Opec-plus announcement of a 2 million barrel per day production cut drew howls from US officials, who interpreted it as a sign of support for Russia.

Delegate Meetings

Washington’s hands-off approach, combined with a flurry of private delegate meetings could be taken as a sign that the group is leaning toward additional action, but ministers were emphatic Saturday that no decision had been made.

Ministers from Saudi Arabia, the United Arab Emirates, Kuwait, Iraq and Algeria met privately in a hotel ahead of Saturday’s ordinary Opec ministerial meeting at the Opec Secretariat offices.

Following the gathering the officials appeared in good spirits and delegates said they are aligned and united without giving further details.

The set of countries represents five of the nine producers who are part of a group of Opec-plus members that pledged to cut an additional 1.66 million b/d beginning in May.

UAE Energy Minister Suhail al-Mazrouei painted a picture of Opec-plus solidarity ahead of the meeting.

“This group is solid,” he told reporters. “We look forward to a resolution that will sustain the balance of supply and demand.”

Saturday's Opec meeting was kept to administrative matters, delegates told Energy Intelligence, leaving more substantive discussions of oil policy for private discussions and Sunday’s Opec-plus gathering.

Following the meeting Saudi Arabia’s energy minister continued to hold private meetings in his suite with African producer states Nigeria, Equatorial Guinea, Congo and Angola, to discuss current policy and future baselines.

Baseline Discussions

The baseline questions — the production level assigned to each member state — are being talked about in earnest, with at least one proposal calling for lowering levels for all those who have not been able to produce their full quota, including some African producers.

With that allowable production allocated to those countries that are growing their capacity, including Saudi Arabia and the UAE.

Revisions could also be on the table for Russia, according to one delegate.

But concrete action to address that complex and controversial issue is believed unlikely at this meeting and delegates say any changes will only take effect in 2024.

Russian Position

Russia’s delegation, led by Deputy Prime Minister Alexander Novak, is expected to fly into Vienna late Saturday.

Russia’s plans are key to the bilateral and small group discussions that have become the primary venue to set policies among the producer group members. In recent weeks, Russian sources indicated that there was limited appetite for an additional cut.

One well-regarded crude market analyst told Energy Intelligence that the group would need to show that any decision it takes will have an immediate impact on the availability of oil in the global market to generate any positive price reaction when trading begins on Monday.

Any Opec-plus decision will be delivered with a healthy dose of rhetoric about the group’s compliance with existing cuts, people close to the matter said.

Quota compliance has always been a source of tension within the group, which in the past has used a system of “compensation cuts” to ensure all members toe the line.

Currently, Russian production is in the global spotlight, following its pledge to cut 500,000 b/d from it February levels and officials there have gone out of their way to demonstrate commitment to achieving compliance with the full pledge.

Energy Intelligence assessments show Russian production down about 300,000 b/d in April.

Sources and certain market data point to the potential that Russia further decreased production in May, which would be welcome news to fellow members.

Options on the Table

Energy Intelligence understands the most drastic of the options on the table would be an additional cut from those Opec-plus producers that can credibly claim to reduce production.

One less dramatic option being discussed is formalizing the 1.66 million b/d voluntary cuts into official Opec-plus production policy, sources told Energy Intelligence.

The group could also choose to extend those formalized cuts, which are due to expire at the end of this year through to the end of 2024.

It's not clear whether a symbolic move could substantially shift the negative sentiment that has dragged on global prices.

A simple rollover of existing policy is also on the table, though the flurry of bilateral discussions could point to this as a potentially unlikely option.

A steady Opec production policy and a moderate oil price could help facilitate US oil purchases for its depleted Strategic Petroleum Reserve, something Opec producers have been keen to see following a massive destocking of the SPR last year.

Mideast Gulf producers have been keen to see the US move ahead with plans to begin refilling its depleted Strategic Petroleum Reserve should benchmark oil prices remain between $70 and $80.

The US announced Friday that Secretary of State Antony Blinken will visit Saudi Arabia from Jun. 6 – 8 to discuss “strategic cooperation” between the two countries “including economic and security cooperation.”

Oil Supply, Opec-Plus Supply , Opec/Opec-Plus, Crude Oil, Oil Prices
Wanda Ad #2 (article footer)
The heads of the IEA, ECB and EIB discussed how Europe can avoid falling behind its competitors in the transition to low-carbon energy.
Fri, Sep 29, 2023
Bulgaria's parliament has voted to phase out imports of Russian crude oil by October of next year.
Fri, Sep 29, 2023
The EIA's latest Petroleum Supply Monthly shows that US crude output averaged just shy of 13 million b/d in the seventh month of the year.
Fri, Sep 29, 2023