OPEC+ Moves Toward Extending Oil Output Cuts to Early 2020

(Bloomberg) -- Oil producers from the OPEC+ alliance are moving toward extending supply cuts into the first quarter of 2020 as they grapple with surging U.S. shale output and weakening demand growth.

After Russia and Saudi Arabia reached a deal Saturday at the Group of 20 summit to roll over curbs by six to nine months, other nations have voiced support for a longer extension into next year as the group gathers in Vienna for a key meeting.

“The longer the horizon, the stronger the certainty to the market,” OPEC Secretary-General Mohammad Barkindo said Sunday in the Austrian capital after meeting with Khalid Al-Falih, the Saudi energy minister. “It will be more certain to look beyond 2019. I think most of the forecasts that we are seeing now and most of the analysis are gradually shifting to 2020.”

Oil ministers from the Organization of Petroleum Exporting Countries and its allies will hold a series of meetings Monday and Tuesday in Vienna to discuss production policy. Saudi Arabia and Russia are the largest members in the group and are usually able to steer the alliance toward their preferred strategy.

Since the two key oil nations came together to manage the market in late 2016, global benchmark Brent crude has oscillated between $45 and $85 a barrel. On Monday, futures for September settlement gained as much as 2.2% to $66.14 a barrel.

Delegates from Nigeria, Venezuela, Iraq and Oman also expressed their conditional support for an extension of as long as nine-months, which isn’t the OPEC policy playbook as the oil-club has traditionally aimed for half-year deals. It remains unclear whether the proposal, which Al-Falih has said he favors, will win unanimous support from all of OPEC’s 14 members.

Until the weekend, OPEC officials had been discussing prolonging cuts through 2019. Yet Russian President Vladimir Putin -- after meeting with Saudi Crown Prince Mohammed Bin Salman -- opened the door to 2020 by mooting longer curbs. That reflects both strategy and tactics: it acknowledges the somber 2020 outlook for supply and demand amid slowing economic growth and rising U.S. output. And it allows OPEC to show the market it’s ready to keep cutting while retaining flexibility to tweak the deal when it gathers again before year-end.

“We think this is clearly a move orchestrated by Saudi Arabia to support current prices amid forecasts of lower demand, or at least try to keep a floor in place,” said Joe McMonigle, an energy policy analyst at consultants Hedgeye Risk Management LLC and a former senior official at the U.S. Energy Department.

Hours after Putin’s meeting in Osaka with Prince Mohammed, Al-Falih said that Saudi Arabia supported a nine-month extension but that “we have to talk to other ministers.” He warned that oil-demand growth had “softened a little bit,” but said there wasn’t a need to deepen the cuts.

Vienna Talks

“I’m for an extension, I think it’s needed for the current conditions of the market,” Suhail Al Mazrouei, energy minister for Saudi Arabia’s regional ally the United Arab Emirates, told reporters in Vienna. “So I’m expecting a rather easier meeting.”

Some nations could be reluctant. In the past, Tehran has fiercely opposed the position of Riyadh, which it blames for stealing Iranian market share. This time around, the Islamic Republic is contending with slumping crude exports as a result of U.S. sanctions that are crippling its economy.

For Moscow, however, there’s an extra incentive to extend the curbs by nine months as Russian oil companies struggle to raise production over the winter. By extending the deal into 2020, Russia could be in a better position to pump more during the spring of next year.

In any event, the group will convene again to review policy before next year. It’s likely to schedule its next meeting for December, according to Barkindo, who also said he expects his term as secretary-general to be renewed beyond its expiry in August.

The current version of the OPEC+ deal calls for production curbs of 1.2 million barrels a day, though the alliance has cut more than it pledged as U.S. sanctions on Iran and Venezuela slashed output from both countries.

Saudi Arabia has also unilaterally made deeper curbs, pumping 9.73 million barrels a day in June, according to a Bloomberg survey of officials, analysts and ship-tracking data. That compares with its OPEC+ ceiling of 10.3 million. OPEC’s total crude output over the month dropped by 130,000 barrels from May to 30 million barrels a day.

“Challenges related to the glut in the oil market are still present and need a decision to bring back balance and support for prices,” Iraq’s Oil Minister Thamir Ghadhban said in a statement while departing for Vienna. “The extension decision leads to an easing of the challenges and problems that oil markets are suffering.”

Among the OPEC+ coalition as a whole, compliance with pledged output cuts was 163% in May, according to calculations by the group’s Joint Technical Committee, relayed by delegates on Sunday.

Saturday’s Saudi-Russia deal suggests that the momentum will be maintained. The extension “paves the way for ensuring the interests of producers and consumers,” Saudi Arabia’s Al-Falih said in a tweet. “This will help reduce global stockpiles and thus balance the market.”

--With assistance from Mohammed Aly Sergie, Golnar Motevalli, Javier Blas, Grant Smith and Fred Pals.

To contact the reporters on this story: Nayla Razzouk in Vienna at nrazzouk2@bloomberg.net;Salma El Wardany in Vienna at selwardany@bloomberg.net;Dina Khrennikova in Vienna at dkhrennikova@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Amanda Jordan

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