The 14 Opec members have been warned to agree production cuts or see another drop in crude oil prices
Oil prices soared by more than 7 per cent towards $50 a barrel on Wednesday after two of Opec’s most powerful members said they were hopeful of reaching the first deal to cut supplies since prices started to plummet two years ago.
Khalid al-Falih, Saudi Arabia’s energy minister, said the cartel, which controls about a third of the world’s oil production, was moving “close” to a deal and signalling it was was working to bridging a gap with its regional rival Iran.
However, he sought to manage expectations saying he was “not concerned about a no agreement scenario”, arguing the oil market was already moving back towards balance.
Iran’s oil minister Bijan Zanganeh said all Opec members were ready to compromise and there was a “framework for a deal”. His tone was notably softer than in recent days. He said the cartel was targeting 1m to 1.2m b/d of cuts between its 14-members.
The ministers were speaking in Vienna where they are meeting to try and reach a deal to curb production and bring an end to a savage two-year downturn in prices that has shredded the budgets of its members.
Brent crude, the international oil marker, rose more than $3.00, or 7.2 per cent, to $49.73 in the late morning in London.
“The pressure is probably too great for them not to reach a deal,” said Jason Schenker of Prestige Economics at the meeting in Vienna. “At the end of this meeting the oil price could have a five handle or a three handle — that’s how big a potential swing we’re talking about”.
Opec reached a provisional accord September in Algiers to bring its total production down to between 32.5m barrels a day and 33m b/d from a near record 33.8m b/d at the moment. But two months later and the group still has not yet agreed how the cuts will be apportioned.
Iran, which is finding its feet after years of Western sanctions, initially said it should be exempt like conflict-ridden Nigeria and Libya. It has since softened its stance saying it will freeze its production, but the level has been problematic.
Saudi Arabia, which will shoulder the burden of any production cuts along with its Gulf allies, has asked Iran to curb output at close to 3.7m b/d, although it privately it has indicated it may allow a higher level near 3.8m b/d.
Mr Falih told reporters that, based on Opec estimates, Iranian supply had recovered to pre-sanction levels and a freeze at this level would be well received by other members. “Hopefully this will be the framework,” he said.
Should Opec strike a deal on Wednesday, the Saudi energy minister said he expected Russia and other countries outside of the cartel to cut around 600,000 b/d of production. The kingdom believes the co-operation of major producers outside of the cartel is necessary for any deal to be effective.
But he also criticised Russia’s public stance that freezing its production, which has climbed to a post Soviet-era high, was acceptable.
“Freezing at an all-time high is not a contribution, [It’s] not a match to what Opec is doing. Our discussion with Russia has been about a cut from non-Opec,” he said.
“The comments suggest there is a growing convergence on positions between Saudi Arabia and Iran which is essential for any deal,” said Yasser Elguindi at Medley Global Advisors. “The big surprise would be a Russian contribution not just to freeze but to join Opec in cuts.”
Algerian Energy Minister Noureddine Boutarfa, one of the architects of the September accord to reduce output, said he was “99 per cent certain” Opec would reach a deal on Wednesday to cut production but did not give any specifics.
The ministers held a breakfast meeting ahead of the formal gathering, an unusual step pointing to a last-minute pish to improve the atmosphere among the group’s members who have been at loggerheads since Algiers.
Abhishek Deshpande, analyst at Natixis said: “A deal now looks more likely, but there are still obstacles to overcome in the meeting.”
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