September 23, 2016
Saudi Arabia would back a co-ordinated production cut of up to 1m barrels a day to tackle a global supply glut that has battered oil prices — but only if its regional rival Iran agrees to freeze output at August levels.
The proposal, which has emerged after weeks of informal talks, comes as members of the Opec producers’ cartel prepare to meet in Algiers for discussions on the oil market, which is suffering its worst downturn in a decade.
It is unlikely an agreement will be reached next week. But by setting out conditions for Opec’s first supply deal since the financial crisis, Saudi Arabia, the world’s biggest oil exporter, is looking to build a consensus for a potential deal later this year.
Its position is likely to meet resistance from Iran, which wants to regain production of at least 4m barrels a day that it said it reached in 2011 before sanctions were imposed on the Islamic state. Tehran puts its current output at around 3.8m b/d, a higher level than estimated by analysts and recorded by Opec.
Oil prices have more than halved since mid-2014 as supply has overwhelmed demand, shredding the budgets of producer nations and major oil companies. On Friday the global benchmark Brent crude fell $1.71 to $45.95 as deal hopes subsided.
Representatives from Saudi Arabia and Iran held talks on curbing production in Iran this week. They will look to do the same when Opec ministers gather at an industry conference in Algeria next week.
While no formal deal is expected, Saudi Arabia hopes an agreement can be reached in November when Opec is due to hold its next ministerial meeting.
“The kingdom is looking for consensus among oil producers to reach a credible arrangement for stabilising oil markets,” a Saudi official said on Friday. “We are looking at different scenarios and options to reaching this goal.”
Saudi Arabia wants any co-ordinated cut to be credible. It also has to be large enough to help stabilise an oversupplied market, with at least 700,000 b/d-1m b/d taken off the market, one person familiar with the matter said.
The Saudi delegation is proposing that Iran caps its oil output at 3.6m barrels a day, the level analysts say it produced in August, while other big producer countries cut their output to levels from earlier this year, three people familiar with the matter said.
Several options are being examined for the second part of the deal, including bringing production back to the average of the first half of the year, the first quarter of the year, or an average rate of production in either January or August. Saudi Arabia this summer raised its output to record levels reaching more than 10.6m barrels a day.
The move represents a shift in tone for Saudi Arabia, which upended the oil market with its decision in late 2014 to keep pumping even as prices spiralled lower. It sought to let prices fall to squeeze out producers of expensive oil, such as that from US shale fields, Canada’s tar sands and ultra-deep water crude from Brazil.
However, analysts remain sceptical of any agreement, saying the bar has been set very high by Saudi Arabia, Opec’s de facto leader. Talks between Opec and other big producer such as Russia for an output freeze ended in failure in Doha earlier this year.
Sample the FT’s top stories for a week
You select the topic, we deliver the news.