Major oil exporters vigilant as Trump starts to wigwag

In Oil & Companies News 28/11/2016

The world seems in for a tectonic shift in direction. With the election of Donald Trump as the 45th president, the way the United States thinks and acts could change drastically.

Two major unrelated developments could be interesting to keep an eye on.

In the Trump era, Moscow, the world’s largest crude producer, is getting close to Washington. A new era of bonhomie is visible. If Trump’s pronouncements during the campaign are to be believed, all of a sudden, from an adversary with competing goals and objectives, Russia and the United States are about to begin an era of friendship, coordination, and cooperation.

And already the manifestations of this newfound friendship are in play. Almost the first telephone conversation that Donald Trump had with any global leader after the elections, was with the Russian president Vladimir Putin.

As per press reports, the conversation between the two was warm with both the leaders agreeing that currently, the US-Russian relations were “absolutely unsatisfactory.” That their two countries would now begin a new dialogue based on “equality, mutual respect, and non-interference in the other’s internal affairs”. They would stay in touch and meet soon, the Kremlin later reported. This was significantly different – in more than one ways.

Could this have ramifications for the energy world too?

Russia is already the world’s largest crude producer. In October, its crude output reached a post-Soviet high of 11.2 million barrels per day. In tons, this was 47.386 million tons – up from 45.483 million tons in September.

And Russia is endeavoring to give a boost to its output further. It expects a rise in oil output in 2017 to 548 million tons, due to new fields coming on-stream. Analysts quoted by Reuters feel that Russia has the potential for growth to 2019 when an output peak of 570-575 million tons could be reached – thanks to investments made before sanctions introduced by the West against Moscow for its role in the Ukrainian crisis in 2014.

In recent weeks, Russia›s No.2 oil producer, Lukoil has launched the Filanovsky offshore oil field in the Caspian Sea, the second major oil field opened by Russia in a week and the fourth this year. Russia would definitely be looking for markets for this additional output. Trump elections seem a God-gifted opportunity.

And while Washington seems to be forging closer, political and economic ties with Moscow, the president-elect seemed to be twisting the arms of Gulf Arab allies, by underlining he wanted to stop buying oil from Arab countries unless they commit ground troops to combat Islamic State or reimbursed the US for its efforts.

During the course of the long election campaign, Trump vowed to secure and strive for the US energy independence from “our foes and the oil cartels,” targeting a “complete American energy independence.”

Could these pronouncements impact the crude buying pattern of the United States – the world’s largest consumer of crude oil? Is it possible, that Trump Administration could start buying more crude from Russia – at the cost of its Gulf Arab allies?

Riyadh is cognizant of the challenges. Defending continued Saudi crude sales to the US, Energy Minister Khalid Al-Falih said in an interview, “at his heart President-elect Trump will see the benefits (of Saudi oil imports) and I think the oil industry will also be advising him accordingly that blocking trade in any product is not healthy.”

Falih added “the US is sort of the flag-bearer for capitalism and free markets,” and that “the US continues to be a very important part of a global industry that is interconnected, that is dealing with a fungible commodity which is crude oil. So having equalization through free trade is very healthy for oil,” he said.

Falih also reminded the president-elect that the US “benefits more than anybody else from global free trade,” adding “energy is the lifeblood of the global economy”.

Saudi Arabia is already the largest Middle Eastern oil supplier to the US with an 11% market share and has also invested heavily in US downstream assets (refineries) to help lock in that supply. Around 31% of all US oil imports are from OPEC members.

Twenty years ago Saudi Arabia was the top supplier of oil to the US market, but they lost that spot to Canada over a decade ago. Still, Riyadh is the second-largest source of US crude oil imports, supplying 1.1 million bpd in 2015.

In contrast, Russian crude exports to the United States are hardly significant. As per the EIA, the US crude imports from Russia in 2015 was only 38,000 bpd. In 2014 it was even below – 18,000 bpd.

Is this all about to change?

Already Riyadh and Moscow are battling it out in China. As the competition to grab market share intensified, Russia edged out Saudi Arabia from the top spot in China, selling more oil to China. According to statistics from China’s General Administration of Customs, Russian oil exports to China increased nearly 42% to over 22 million tons from January to May. For the same period, Saudi oil exports to China totaled 21.8 million tons.

At the beginning of the decade, Saudi market share of the Chinese market was around 20%, while Russian crude exports were below 7%. Saudi sales to China – doubled to more than 1 million bpd in 2011 from 500,000 bpd in 2007 – but has barely grown since. Russian oil exports to China over the past five years has doubled – up by 500,000 bpd

Russia has been exploiting a tactical advantage over Saudi Arabia in the Chinese market. Moscow uses the Russian-Chinese oil pipelines that are already in place, to ship oil to the Chinese markets, whereas, the voyage for Saudi crude to China (a distance of around 6500 nautical miles) can take three weeks or more.

Bloomberg said that the energy relationship between the two neighbors has continued to deepen since Russia started sending oil supplies to China via the ESPO pipeline in 2011. Already there are talks of laying down a second pipeline between the two countries, to carry additional crude.

In order to overcome this handicap and increase crude sales to China, Saudi Arabia has lately been offering more cargoes at spot prices with more lenient payment terms.

Saudi Aramco is also expanding its oil storage capacity in Okinawa in southern Japan by nearly a third. In April this year, Aramco sold its first cargo of Arabian Heavy crude to a Chinese independent refiner from Okinawa in a trial spot shipment.

Saudi Arabia is also looking at setting up additional storage in China, with the two countries signing a memorandum of understanding to consider the matter earlier this year.

And the battle rages.

Could we expect the same in the US markets too? This is yet to be seen. There are no hints as yet to this effect. But things continue to be fluid in Washington. And in the wake of Trump presidency, nothing could be ruled out.

Interesting times seem just ahead!

Source: Saudi Gazette

Oil bets are biggest in 9 years amid Opec, Trump volatility

In Oil & Companies News 28/11/2016

Money managers, producers and consumers made the biggest bets on West Texas Intermediate crude prices in nine years, amid signals more volatility is coming.

Global markets were roiled after Donald Trump’s election as US president and as Opec continued negotiations on a deal to cap output. The US dollar climbed to the highest since January. A measure of oil volatility surged last week to a seven-month high, a sign that traders were anticipating bigger price swings.

Wagers on higher and lower prices held by speculators and hedgers reached 1.47mn contracts in the week ended November 15, the most since 2007, US Commodity Futures Trading Commission data show. Trading volume of calls giving investors the right to purchase WTI futures rose to a record that day. The CBOE Crude Oil Volatility Index reached the highest since April.

“There’s tension in the market, with both producers and consumers worried about what Opec does or won’t do on November 30,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “They want to be protected from surprising price moves.”

Investors are weighing the chances that the Organization of Petroleum Exporting Countries will complete a deal to cap output at its November 30 meeting in Vienna. While Saudi Arabian Energy Minister Khalid al-Falih told Al Arabiya television he’s optimistic a deal will be reached, only seven of 20 analysts surveyed by Bloomberg recently expect the group to set output targets for its members.

Opec agreed in September to cut their collective output to 32.5mn to 33mn bpd and has been trying to persuade other suppliers, notably Russia, to join the cuts. Opec secretary general Mohammed Barkindo said he’s confident the group can reduce record oil inventories and bring forward the rebalancing of the market.

“The Saudis are working hard to reach a deal,” said John Kilduff, a partner at Again Capital, a New York-based hedge fund that focuses on energy. “You don’t fight the Fed in the bond market and when it comes to oil you don’t fight the Saudis.”

The September agreement marked the end of Opec’s two-year long experiment with pumping at will. Saudi Arabia led the group in the effort to grab market share and curb the development of more expensive reserves such as US shale.

While US production has dropped from last year’s 44-year high, the decline is slowing. The Energy Information Administration this month raised its output forecast for 2017. Rigs targeting oil in the US rose the most in 16 months last week, according to Baker Hughes Inc.

Producers and merchants increased short positions, or protection against lower WTI prices, to the highest level since March 2011. They added 66,613 bearish contracts over the past two weeks as prices retreated from last month’s peak at above $50 a barrel.

“The Saudis want higher prices but won’t sacrifice just to see a major competitor, US shale, benefit,” said Sarah Emerson, managing director of ESAI Energy Inc, a consulting company in Wakefield, Massachusetts. “The Trump election changes things. In one day the US shale business got better. The government will be more responsive to the industry.”

Money managers’ net-long position in WTI advanced for the first time since mid-October, climbing by 3,906 futures and options to 163,321. Shorts climbed 14% while longs rose 8.1%.

In fuel markets, net-bullish bets on gasoline decreased 35% to 25,796 contracts, as futures slipped 2.5% in the report week. Money managers were net-short 393 contracts of ultra low sulphur diesel, from net-long 7,791 the previous week. Futures advanced 0.2%.

“I suspect that when the Opec meeting is over there will have been a lot more smoke than fire,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “If they don’t come up with a convincing agreement, they’ll be forced to revisit the issue before long.”

Source: Bloomberg

An OPEC deal to cut output could disappoint markets

In Oil & Companies News 28/11/2016

Oil prices have fluctuated on comments that OPEC countries might agree to an output cut next week. However, the historic meeting might not be enough to revamp oil prices.

Libya and Nigeria aren’t expected to sign the deal and the full-backing from two key countries – Iraq and Iran – is not guaranteed.

CNBC takes a look at what might happen in Austria next Wednesday.

Why is the OPEC meeting on Wednesday important?”

It’s the first time since November 2014 that OPEC members meet to try to control oil prices,” Colin Smith, head of oil research at Panmure, told CNBC over the phone.

Oil prices have been trading at historic lows given an oversupply in the market. Brent crude started this year trading at $35 a barrel and though they have rebounded to about $45, the oversupply is expected to remain a drag throughout 2017.

The production of shale oil in the U.S., Iran’s attempt to increase oil exports, and sluggish growth in advanced economies are the main factors bringing oil prices down.

What are the chances of a deal?

President Nicolas Maduro of Venezuela said Wednesday that a deal to cut output was “imminent” and asked his oil minister to talk to Russia in an attempt to bring non-OPEC members to support he deal.

But analysts have doubts whether, and to what extent, an output cut will be agreed upon.

“We believe there is a 70 percent chance that OPEC could announce a 1 million barrel of oil per day production cut on next Wednesday, 30 November, during the cartel’s formal meeting in Vienna,” Nomura said in a research note.

However, research from Societe Generale is less optimistic. “Our view is that it is a 50-50 tossup, and it is not currently factored into our balances,” the French bank said in a note.

Smith from Panmure told CNBC that “while reaching agreement looks tricky, it would be surprising if there was not some kind of firm commitment from Saudi and its key Gulf allies, given all the issues were clearly visible at the Algeria meeting, yet Saudi was willing to sign up to a revised OPEC target.”

Reuters reported that OPEC members will debate an output cut of 1.2 million barrels a day, but Iran, Iraq and Indonesia have shown reservations to such proposal.

“There is likely to be some level of action to cut output but it may not be clear whether that will be sufficient to meet the new 32.5 – 33 million barrels a day target,” Smith added.

What’s the role of Russia?

Russia is not part of the OPEC group but its troubled economy would benefit from an increase in oil prices. But the solution advocated by Moscow is an output freeze and not an output cut.

The country’s energy minister, Alexander Novak, said Thursday that Russia could cut down its oil production plans in 2017 if a global output freeze pact is applied, Reuters reported.

Though Russia’s involvement is seen as market positive, it’s unlikely that the final deal would require a formal backing by non-OPEC members, Smith explained.

What is the worst possible scenario if the OPEC doesn’t reach an agreement?

“If no OPEC agreement is reached, we would probably revise our 2017 price forecast significantly downward, because we would be left with our current neutral fundamental outlook. Without an OPEC cut, the global rebalancing will progress much more slowly than previously expected and be pushed beyond next year,” Societe Generale said.

The French bank is expecting Brent to reach $52.50 in the first quarter of next year, $55.00 in the second quarter. WTI is forecast at $51.00 in the first quarter and at $53.50 the second quarter.

How will markets react?

“Trust is a one-time gift. OPEC proposed this production cut (of 1 million barrels per day) in September during the informal meeting in Algeria. Failure to ratify this production cut in Vienna could risk losing the trust of the market, triggering further oil price weakness,” Nomura warned in a note.

What will happen to oil prices?

OPEC’s aim is to increase oil prices from their current historic low levels. According to Nomura, prices should go up by at least $2 per barrel of oil.

“We believe oil prices will almost certainly rise more than USD2/bbl in the weeks following this potential OPEC production cut. This means that OPEC can most likely benefit from rising revenue despite cutting production and potentially ceding some market share to US shale producers,” the bank said.

Goldman Sachs is also expecting some deal next week to normalize oil prices. “We think a cut should generate backwardation – helping OPEC grow market share by sidelining higher-cost producers – and reduce oil price volatility – increasing the valuation of their debt and equity,” the investment bank said in a note earlier this week.

Source: CNBC

OPEC talks struggle with question of market share: Kemp

In Oil & Companies News 28/11/2016

OPEC officials are struggling to reach a final agreement on how to share out production cuts implied by the preliminary output accord agreed by ministers in September.

In theory, all OPEC members would benefit in absolute terms if an output cut produced even a modest and sustained rise in oil prices, so there are strong financial incentives for a deal.

But all members are acutely aware an agreement is about more than just a short-term boost to export earnings and has implications for the future regional power structure in the Gulf, which makes a deal harder.

Saudi Arabia will not accept any diminution of its dominant role as the world’s largest oil exporter and the major financial power in the Gulf region. By contrast, Iran and Iraq do not want to cement Saudi hegemony.

The political implications for the regional power structure caused the last attempt to negotiate a production deal to fall apart in Doha in April, when it was vetoed by the Saudi royal court, and could yet do so again.

OUTPUT AND POWER

OPEC members need to find cuts totaling at least 640,000 barrels per day (bpd) and perhaps as much as 1.14 million bpd to bring production back into line with the target of 32.5 to 33.0 million bpd.

Saudi Arabia has indicated a willingness to curb its production provided cuts are shared equitably among the organization’s members and the agreement is transparent, credible and verifiable.

Saudi officials have indicated any agreement can provide some flexibility for Libya and Nigeria, both of which have been hit by supply interruptions which officials characterize as temporary.

But Iran, which claims its output is still recovering from the imposition of secondary sanctions by the United States between 2011 and 2015, has a more ambiguous claim to flexibility.

And Saudi officials have made clear that all members of OPEC must share in the burden of production cuts, including Iraq.

In theory, the negotiations turn on mundane issues including claims for exemptions and the use of members’ own production data versus estimates from “secondary sources” to establish baselines from which to cut.

In reality, the negotiations are about the profound issue of sharing out oil revenues and diplomatic, military and economic power, which is what makes progress so difficult.

RELATIVE WINNERS

OPEC members are reportedly trying to reach agreement on a deal lasting for just six months, but the production allocations are likely to be cited as a baseline for future deals.

Production allocations reached now risk become embedded in future agreements, which is why Iran and Iraq are resisting attempts to bind their output at low levels, or even at all.

Saudi Arabia and the United Arab Emirates are both currently producing record volumes of oil and their share of total OPEC output is relatively high in historical terms.

Both are status quo powers and want any production freeze or cuts to be calculated from a current production baseline.

By contrast, Iran’s production remains well below the peak achieved before the revolution, war with Iraq and U.S. sanctions took their toll, and the country’s share of OPEC output is relatively low.

Iraq’s production is currently at an all time high, but like Iran its share of total OPEC output remains relatively low by historical standards.

Iran and Iraq are disruptive powers intent on challenging the status quo, with less interest in an agreement that entrenches current production baselines and restricts their ambitions to grow future oil output.

The political implications explain why any deal can only be agreed at ministerial level at the end of November; the issues cannot be resolved by officials alone during the technical talks currently underway.

But any eventual deal on production allocations will only be possible if it has political backing, at least implicitly, from top political leaders in Riyadh, Teheran and Baghdad.

BASELINE QUESTION

Experienced negotiators understand that the initial baseline from which discussions proceed has enormous implications for the outcome.

The party that succeeds in establishing the baseline is likely to achieve the most important gains from the negotiations.

Saudi Arabia and the UAE therefore tend to focus on recent production and export levels from the 1990s and 2000s when talking about output allocations.

But Iran and Iraq have both experienced significant disruption of their oil production and exports during the last 30 years as a result of unrest, war and sanctions.

Iran tends to focus on production levels and market share from much further back in the 1960s and 1970s to support its claim for a higher allocation.

The contrasting fortunes of the major Gulf states over the last 50 years explain why agreeing on a baseline for allocations is so difficult.

In 1965, Saudi Arabia’s crude and liquids production stood at around 2.2 million bpd, slightly ahead of 1.9 million bpd in Iran and 1.3 million bpd in Iraq.

Between 1965 and 2015, however, Saudi production increased by 440 percent compared with 207 percent for Iraq and 105 percent for Iran.

Saudi Arabia’s crude and liquids production stood at 12.0 million bpd in 2015, which was three times higher than the 3.9 million bpd in Iran and 4.0 million bpd in Iraq (“Statistical Review of World Energy”, BP, 2016).

SETTING ALLOCATIONS

OPEC has struggled with the question of production baselines and output allocations throughout its history.

In the past, there have been proposals to base allocations on: current production; nominal capacity; historical output; proved reserves; population size; revenue requirements; and development needs (GDP per capita).

OPEC members have proposed allocations based on all these concepts at different times in the past without agreeing even in principle on which is the most suitable or equitable.

In practice, Saudi Arabia has usually decided how much to produce and cajoled the United Arab Emirates and Kuwait to accept allocations.

Iran, Iraq and other members have been left to produce as much as they are able given war, unrest and sanctions (“OPEC and other commodity cartels”, Alhajji and Huettner, 2000).

CREATIVE DIPLOMACY

OPEC officials are currently struggling with how to come up with an agreement that cuts production in the short term without appearing to prejudge the question of long-term market shares.

Diplomats are paid to resolve differences and when that isn’t possible to come up with an agreement so complicated and ambiguous everyone can claim to have won (or at least avoid the appearance of having lost).

OPEC’s negotiators have several options for trying to reach a suitably flexible and ambiguous agreement and appear to be utilizing at least some of them.

The first is to make clear that any agreement on allocations is time-limited, leaving open the question of whether it will be extended or form the basis for future deals.

The second is to grant to selective exemptions, either explicitly or by allowing some members to state that they are not bound by their allocations. OPEC has used this tactic in the past.

The third and most important source of flexibility is creativity around the baselines where there are lots of opportunities for creative obfuscation.

The choice of reference period gives plenty of scope to adjust which members must cut the most and which must cut the least. Different members could even be given different reference periods.

In extremis, OPEC members could give up setting production levels and simply announce by how much each country will cut output, leaving the exact baselines undefined. OPEC has used this tactic before, too.

In the run up to the ministerial meeting on Nov. 30, there is plenty of scope for creating lots of useful diplomatic confusion.

In the end, however, an agreement is as much about regional power as about oil revenues, and that means it goes beyond ministerial level to political leaders.

The question is whether Saudi Arabia, Iran and Iraq can reach a deal despite disagreeing about the regional power structure, or whether the wider competition for influence will torpedo an accord.

Source: Reuters (Editing by David Evans)

Saudis Walk Away From Russia, Oil Talks Fall Apart

In Oil & Companies News 28/11/2016

Saudi Arabia is walking away from upcoming talks with non-OPEC members, including Russia, amid disagreements on how to share the burden of oil production cuts.

OPEC officials were scheduled to meet with non-members including Russia on Monday before an OPEC ministerial meeting in Vienna on Wednesday. The meeting was later canceled entirely after the Saudis decided to not participate, according to a Bloomberg report.

Two delegates said that OPEC is regrouping and has called another internal meeting to try to resolve its own differences, particularly participation by the cartel’s second and third largest producers, Iraq and Iran.

Both Iraq and Iran have inched closer recently to agree to an oil production cut. One delegate said Saudi Arabia wants an OPEC deal in place before conversations with other producers such as Russia.

However, bringing Iraq and Iran on-board will not be an easy task for the Saudis. Iraq, for its part, has stated that it needs oil revenue to continue its battle against ISIS. Moreover, last month Baghdad encouraged international oil companies operating in Iraq to actually ramp up oil production next year – a position diametrically opposed to any kind of oil cut agreement.

Baghdad also claims that it lost valuable oil market share to other OPEC members when the country was placed under international sanction during the presidency of Saddam Hussein.

Former international sanctions could also cause Iran to balk at any OPEC oil production cut plans. The country emerged last year from several years of Western sanctions placed against its energy sector over Tehran’s nuclear ambitions. However, Iran, currently pumping 3.92 million barrels per day (bpd), is still about 800,000 bpd shy of its pre-sanctions goal of 4 million bpd.

If either Iran or Iraq balk at oil production talks next week, it could place the burden on Saudi Arabia to make up the difference. However, its not clear if the Saudis would be willing to pick up the slack or would simply walk away from oil production talks – a topic I addressed in a post yesterday.

Oil futures prices fell on Friday, with traders adopting a wait-and-see stance ahead of next week’s OPEC meeting. Global benchmark, London-traded Brent fell $1.92, or 3.9%, to $47.08 a barrel. U.S.-benchmark West Texas Intermediate (WTI) crude prices also dropped for the session, down $2.02, or 4.2%, at $45.93 a barrel.

Source: Forbes

Oil market intervention will speed balancing process: Saudi energy minister

In Oil & Companies News 28/11/2016

Saudi Arabia’s energy minister Khalid al-Falih said on Sunday that he believed the oil market would balance itself in 2017 even if producers did not intervene in it.

Any intervention will aim to expedite the balancing process, Falih told reporters at the headquarters of national oil giant Saudi Aramco.

Under a preliminary agreement reached in September in Algeria, the Organization of the Petroleum Exporting Countries would reduce its production to between 32.5 million and 33 million barrels per day, its first supply curb since 2008.

OPEC is now trying to finalize that agreement, and wants non-OPEC producers such as Russia to support the intervention by curbing their own output.

Falih said on Sunday that Saudi Arabia was sticking to its position on the Algiers agreement, that everyone should cooperate.

Source: Reuters (Reporting by Reem Shamsedinne; Writing by Andrew Torchia)

OPEC scrambles to clinch oil output freeze deal ahead of Vienna meeting

In Oil & Companies News 28/11/2016

OPEC meets Wednesday with its credibility on the line, as ministers race against a self-imposed deadline to finalize a long-debated oil output freeze aimed at hastening the market’s rebalancing and shoring up slumping prices.

Details of the freeze pact, first unveiled in Algiers in late September, remain in flux, with various countries — even from outside the producer group — talking up their positions through the media, as they angle for leverage.

Oil prices, which have whipsawed over the last two months, have risen in the past week on reports that OPEC members were apparently narrowing their differences. But close watchers say the stubbornly lingering obstacles — including individual country allocations, exemptions for certain members and which production statistics to use — may yet be a bridge too far.

“Ultimately, I do believe members are trying to reach a deal, but right now, it’s hard to know what is posturing as part of a negotiating position and what is an absolute red line,” said Yasser Elguindi, a Philadelphia-based analyst with Medley Global Advisors. “Unless the positions staked out so far are negotiable, it’s quite possible that there will not be a deal in Vienna.”

All that has been settled at the moment is what was announced in Algiers: a goal for OPEC to freeze production between 32.5 million b/d to 33 million b/d, which would require a cut of between 640,000 b/d to 1.14 million b/d from October levels, according to the organization’s own estimate. If finalized, it would be OPEC’s first coordinated cut since 2008.

Any deal will have to be based on goodwill and trust, as OPEC has no formal authority to enforce compliance within its own membership, let alone externally among the non-OPEC producers it hopes to engage.

By all accounts, OPEC kingpin Saudi Arabia is eager to seal the freeze to provide some fiscal relief, but all along, it has been insistent that any cut burdens have to be shared equitably and transparently, as it withdraws from its long-standing role as the market’s sole significant swing supplier.

While Saudi Arabia is apparently willing to exempt Libya and Nigeria from the freeze as they recover from internal strife, it has been less amenable to requests from Iraq and Iran for relief.

Iran, which told OPEC it produced 3.92 million b/d in October, has been insistent on its right to regain its pre-sanctions market share of some 4 million b/d before agreeing to output restraints, while Iraq, which said it produced 4.78 million b/d in the month, has said it is entitled to an exemption as it fights the Islamic State on behalf of the world.

Both self-provided figures are far higher than independent estimates, with S&P Global Platts pegging Iran’s October production at 3.67 million b/d and Iraq’s at 4.56 million b/d.

Iraqi prime minister Haider al-Abadi offered some hope for a detente earlier this week, saying his country would be willing to partake in an OPEC-wide cut, though he provided no particulars, and no grand bargain has been announced.

MARKET SHARE BATTLE

A failure to finalize the freeze, after months of talking it up, would prolong not only the market’s supply gut, but also extend the fierce market share battle within OPEC that has seen Saudi Arabia, Iran and Iraq boost output and exports to multi-year highs.

“The Saudis want a real durable deal. If there’s no deal, the Saudis will not cut production,” Matthew Reed, a Washington-based vice president at Middle East consulting firm Foreign Reports, said on a Platts Capitol Crude podcast that will go online November 28. “If this deal were to fail spectacularly now, OPEC would effectively be leaderless, not by any fault of the Saudis, but because they just simply couldn’t herd all these cats together.”

Analysts say oil prices are likely to tumble if OPEC is unable to reach a credible agreement, though there is not as much consensus on how far down they would go, given that the market is already showing signs of rebalancing.

On the other hand, if OPEC clinches a deal and sends prices higher, US shale production is likely to return in full force, limiting the price upside, analysts say. With many of OPEC members’ economies hurting as the oil market enters its third year of malaise, even temporary relief may be welcome.

“A cut to 33 million b/d probably maintains the status quo — slowly returning rigs to active status as prices hover in that $50-$55/b range,” said Tony Starkey, managing director of analysis for S&P Global Platts Bentek in Denver. “If OPEC cuts to 32.5 million b/d, then we expect prices to reach $60/b next year which should accelerate, to an extent, the already upward trend in drilling activity here in the US.”

NON-OPEC TALKS

Central to the deal’s success will be the participation of non-OPEC state producers, which is far from certain.

The International Energy Agency in its most recent monthly oil market report raised its 2017 forecast for non-OPEC production growth to nearly 500,000 b/d, with Russia accounting for 190,000 b/d of that.

OPEC will hold a technical meeting Monday in Vienna with several key non-OPEC countries, including Russia, to lobby them to join their efforts.

Russia has only committed to freezing its production at record highs of some 11.2 million b/d, while no other countries have offered any specifics beyond general support for OPEC’s plan. In fact, several non-OPEC producers told OPEC at an October technical meeting in Vienna that they were not in any position to cut output.

Negotiations are continuing over the weekend, with Russian energy minister Alexander Novak set to meet with his Venezuelan counterpart Eulogio del Pino, as well as Kazakh energy minister Kanat Bozymbayev.

Within OPEC, Algerian energy minister Noureddine Bouterfa, who is serving as an intermediary in talks between Saudi Arabia and Iran, sources say, will visit Tehran Saturday to meet Iranian oil minister Bijan Zanganeh.

It will all set up a busy week in Vienna, as ministers hold a last flurry of bilateral and multilateral talks ahead of Wednesday’s formal ministerial meeting.

Many OPEC watchers say that the producer group will be mindful to avoid a repeat of April’s summit in Doha, when a proposal to freeze production at January levels fell apart at the 11th hour over friction between Saudi Arabia and Iran, denting the organization’s reputation.

Whether that yields a durable deal that meaningfully addresses the global supply overhang or a more mealy agreement, such as one that reinstates a collective ceiling but includes no individual country quotas, is to be seen.

“We remain convinced that Saudi Arabia and OPEC President [Mohammed] Barkindo have put their reputation on the line and are fully aware of the implications of failure,” Barclays analysts said in a note. “That is why we continue to believe that we will see a face-saving statement, which shows the organization can still come to an agreement but not veer too far from what countries had planned initially.”

Source: Platts