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OPEC starts talks on output boost with Iran still unconvinced

Bloomberg logoBloomberg 6/21/2018 Golnar Motevalli, Salma El Wardany and Elena Mazneva

Ministers from some of the world’s largest oil producers met in Vienna to seek out a compromise that would pave the way for an output increase at Friday’s OPEC meeting.

Saudi Arabia, backed by Russia, was urging the group to help consumers by boosting oil supply. It’s arch rival Iran remains unconvinced that such a move is necessary, although it has backed away from a threat to veto any increase and was willing to join negotiations in the Austrian capital.

The talks are the culmination of a process that has whipsawed oil markets for weeks. Saudi Arabia and Russia’s desire to roll back production cuts has encountered fierce opposition from Iran and Venezuela, while U.S. President Donald Trump has lobbed the occasional rhetorical bomb at the cartel on behalf of consumers.

"Our costumers have spoken loudly and we must listen to them,” Saudi Energy Minister Khalid Al-Falih said before the ministerial talks on Thursday. He warned his fellow oil producers about rising consumer anxiety and the potential for high prices to have a negative impact on demand. 

The odds of the Organization of Petroleum Exporting Countries reaching a deal have improved through the week. Iran has softened its position, going from outright rejection of any increase to a willingness to discuss numbers. Saudi Arabia has put forward a plan that would add 600,000 barrels a day -- about 0.5 percent of global supply -- smaller than the 1.5 million boost Russia had been proposing.

If the Saudi position prevails, it would allow OPEC and its allies to partially offset the impact of the collapse in Venezuela’s oil industry and feed fast-growing demand -- two factors that played a big part in Brent crude’s surge to above $80 last month.

“The voice of the consumer is being heard in Vienna,” Daniel Yergin, vice chairman of consultant IHS Markit Ltd., said in a Bloomberg television interview. “That consumer could be one in the United States, but it’s also India, it’s China, and even Russian consumers.”

Intensive Talks

After a day of diplomatic back-and-forth, ministers were increasingly positive that a deal was within reach. Still, as officials converged on the OPEC headquarters on Thursday evening for a meeting of the committee that oversees the production cuts, there was work to be done.

“I’ve yet to be convinced that, with market stability at the moment, a production increase is justified,” Iran’s Oil Minister Bijan Namdar Zanganeh told reporters before talks with his Russian counterpart Alexander Novak, who said he would seek “reasonable compromises.”

Oil prices fell in London, with benchmark Brent crude losing as much as 2.4 percent to $72.94 a barrel.

The only route to a production boost that Iran has publicly suggested -- allowing the handful of countries that have voluntarily cut deeper than necessary to restore some output -- would deliver far less extra oil to the market than the Saudi proposal.

a screenshot of a cell phone: Uneven Split© Bloomberg Uneven Split

The kingdom’s plan involves a complex calculation based on how much the group has cut production beyond the initial target of 1.8 million barrels a day set in 2016, said delegates, asking not be named discussing private meetings.

Saudi Arabia and its allies estimate that total cuts now amount to 2.8 million barrels a day. Their proposal would share out a quota increase of 1 million barrels a day between all members of the group. In reality, because many countries that have cut the deepest can’t increase production, that would probably translate to just 600,000 barrels a day of crude flowing back on to the market.

"Allocating to Saudi Arabia part of the quota of countries that cannot increase output could be a technical solution, but may not be a political one," Al-Falih said.

The convoluted plan shows the difficulty Saudi Arabia has in bridging the gap between the competing interests of different members. Venezuela, Algeria or Iraq -- nations which have limited scope to increase production -- have also shown resistance to the proposal.

“We’re in comprehensive talks with all ministers, especially Saudi Arabia and Iran,” Iraq’s Oil Minister Jabbar al-Luaibi told reporters on Thursday. “We are trying to narrow the gap between the two and we hope that this afternoon reach some sort of good compromise.”

Trump’s involvement in pressing for OPEC to act -- which in addition to his tweets include a behind-the-scenes request for a 1 million-barrel-a-day supply hike -- could make it difficult for Tehran to accept a compromise. Zanganeh has said the U.S. president is to blame for high prices because of his decision to reimpose sanctions on Iran.

The outcome of the committee meeting underway in Vienna could give oil users around the world a strong indication as to whether they face the prospect of rising prices later this year -- possibly as high as $100 a barrel -- or more plentiful supply that would ease the cost of gasoline and diesel.

“Consumers are asking for more supply in the second half,” said Saudi Arabia’s Al-Falih said earlier on Thursday. “One thing you can be assured of is: we will be responsive, we will release supplies to make sure there’s no shortage.”

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