Amid talk of cuts, Opec+ rollover still most likely

As the Opec+ alliance prepares to meet on Sunday, the talk among delegates in Vienna around the need for another cut to output quotas has been gathering pace. But a rollover of current targets still appears the most preferred outcome.

Opec+ ministers have so far been tight-lipped, revealing almost nothing on their thinking on policy.

Following Saturday's Opec meeting, ministers restricted their comments to highlight how smoothly the meeting went. Saudi energy minister Prince Abdulaziz said the gathering was "fantastic." The Gabonese oil minister told Argus "everything went well."

But, privately, delegates have been signalling that members have yet to coalesce around one proposal, and that all options still remain on the table.

One idea under discussion is a 1mn b/d cut to production quotas from May and June levels, two delegates said. A cut now would "support the market," one said.

Front month Ice Brent futures rose 5pc over two days to close the week at $76.40/bl. But that is still down almost 10pc on the price immediately after eight countries, led by Saudi Arabia, announced in early April a voluntary 1.16mn b/d of cuts to their combined quota from May. Sanctions-hit Russia also pledged at the time a continuation of its 500,000 b/d cut, to lift the headline figure to 1.66mn b/d.

But the delegates said this has received pushback from several key members of the alliance who insist now is not the time for another cut.

"They argue that there is no need for a cut to production [quotas] now, particularly considering what we are expecting to see in the second half of the year," one said.

Most demand forecasts, including Opec's own, see much of the year-on-year growth in oil demand this year coming in the second half, bringing with it a tighter supply-demand balance.

This, coupled with the ongoing economic uncertainties, and the lack of clarity still on the impact of the latest voluntary cut from May, has made a rollover of current quotas still the most preferred outcome.

It is "too soon" to introduce another round of cuts to targets ꟷ voluntary or otherwise ꟷ one delegate said, particularly as the last round only took effect one month ago. "Announcing another cut so quickly after the first could be chaotic," they said.

Where to from there?

The current Opec+ deliberations are focused on what action to take through the end of this year, when the current agreement expires.

But delegate sources said there has already been some talk around what happens beyond 2023, be that an extension of the current deal and quotas into 2024, or the start of a new deal, under new baselines that are more in line with the realities on the ground.

Baselines ꟷ the production level on which countries' cuts are calculated under the deal ꟷ have been a point of contention for some countries in in the group that believe they should be allowed to pump more than they currently are.

Over the past year Nigeria and Iraq have raised the issue, despite both still struggling to hit their current quotas. But most pressing is the case of heavyweight the UAE, which has for some time being vying for an increase to its baseline to better reflect both its current production capacity, and its expansion plans.

The UAE's baseline under the current deal is around 3.18mn b/d, well below its current capacity of around 4.2mn b/d. It is planning to expand capacity to 5mn b/d by 2027.

By Nader Itayim, Bachar Halabi and Aydin Calik