Energy Intelligence | Saudis to Propose Opec Cut, With a Twist

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Saudi Arabia is set to table a proposal for an eventual 1 million barrel per day cut in Opec production, in a surprise move that confounds widespread expectations that Friday's Opec meeting would be an uneventful affair with a simple rollover of the group's existing strategy.

Although a cut is still not expected to result from this meeting, the proposal suggests the kingdom is looking at ways of managing a potentially choppy market next year (IOD Dec.1'15).

But in a twist, the kingdom would be prepared to consider a coordinated cut in oil production to ease the market back into balance only if a number of challenging conditions are met, a senior Opec delegate told International Oil Daily on Wednesday.

The proposal to cut production would not take effect at the upcoming Opec ministerial meeting on Dec. 4, but may be achieved in 2016, according to the Opec delegate.

Saudi Arabia led Opec's historic decision in November 2014 not to cut production, and to instead let market forces take care of bringing a massive supply overhang into balance.

Despite facing budget pressures from falling oil prices -- now below $50 -- the kingdom has been unwilling to cut production or agree to lower the Opec ceiling below 30 million b/d, arguing that others -- in Opec and outside -- must share the burden with Saudi Arabia (IOD Dec.2'15).

Under the new proposal, which has not yet been formally presented, Opec would cut production by 1 million b/d -- provided some fairly exacting conditions are met.

Non-Opec states such as Russia, Mexico, Oman and Kazakhstan would also have to participate, the source said. The source did not reveal the amount that non-Opec states would be expected to cut.

The second condition is that war-torn Iraq, which is exempt from Opec quotas, should freeze production at current levels of around 4 million b/d or agree to cut with the group.

The third is that Iran must also participate. The Islamic republic, which expects Western sanctions to be lifted in early 2016, wants to add 1 million b/d in the coming year or so (IOD Nov.18'15). This new supply would come at a time when the market is already oversupplied and would send a bearish message to oil markets, the delegate said.

Saudi Arabia and Venezuela are scheduled to meet on Thursday, one day before Opec's official gathering on Friday. Other member states have also been invited to attend, say multiple delegates. The proposal could be presented at this meeting, the delegate said.

The conditions are a big ask by the kingdom, given that non-Opec states have rarely participated in Opec cuts. But unless these conditions are met, Saudi Arabia will continue pumping at current rates of over 10 million b/d, the delegate said, adding that the kingdom is undertaking economic reforms to shield itself from lower oil prices.

Russia has consistently indicated this year that it has no intention of cutting with Opec (related). Even when the Russians have agreed to join Opec action in the past, such as in the 1990s, they have not delivered on their promises, Opec delegates complain.

Iraq has resisted calls to participate in Opec cuts, arguing that years of war and sanctions should make it exempt from Opec action.

And Iran is fixated on adding 1 million b/d to its exports in the 12 months after sanctions are lifted. Tehran has made it a national priority to ramp production back up to 4.3 million b/d, from 3 million b/d now, and to regain customers lost under sanctions.

The delegate expressed optimism that major producer Russia could reverse its position and agree to cut production. Saudi Arabia and Russia have met several times over the last year, trying to bridge gaps over economic and political policy.

The delegate added that any cut in production by Opec that does not include these conditions would be ineffective and would only lead to a short-term rise in prices before another drop. The delegate declined to say whether the kingdom was making any effort toward improving communication with non-Opec states in a bid to reach such an agreement.

Should these conditions be met, however, the delegate expressed optimism that the market could gradually be brought back into balance with a series of cuts that would restore a lasting stability to oil markets.

The Saudi idea is to start with a 1 million b/d cut and then reassess the impact on the market. It is unclear how the cut would be implemented and whether it would involve a reinstatement of quotas.

Such action would help draw down the huge buildup of oil stocks, which in the OECD are now 275 million bbl over the five-year average for crude and products. It would not be designed as a sudden, large move with a big psychological impact on the market, as Opec implemented in 2008-09 when it agreed to a 4.2 million b/d cut in response to the global recession.

The Saudi proposal seems bound to encounter skepticism -- with some likely to view it as an attempt to head off calls for Opec action from more hawkish members by showing a willingness to act, but setting conditions that are too tough to be realized.

Venezuelan Oil Minister Eulogio del Pino will present a proposal to cut Opec's production by 5%, Venezuelan President Nicolas Maduro said Tuesday.

But the Saudi proposal would be consistent with the kingdom's stance since last year that it was not willing to bear the brunt of cuts alone.

It's also evident that prices have fallen harder than Riyadh expected when it pushed through the new policy a year ago.

Saudi Arabia may not want to see prices rise too high until the current approach of squeezing high-cost producers bears fruit, but equally would not want to see them collapse further -- for domestic and Opec reasons.

The proposal also suggests that Saudi Arabia is looking at new approaches to market management that lie somewhere between the traditional system of large, coordinated Opec cuts and the current laissez-faire policy.

Amena Bakr and Alex Schindelar, Vienna

Saudis to Propose Opec Cut, With a Twist

THU, DEC 3, 2015