Opec faces dilemma over cuts decision

Opec ministers convene in Vienna tomorrow to discuss how to balance the oil market amid an expected supply glut in the first quarter of next year. But there appears to be a lack of consensus on how to proceed ahead of the meeting.

The ministers are expected to consider two main options. The first is to extend the current production restraint agreement by three months to the end of June next year and to call on all members party to the deal — both those in Opec and the 10 non-Opec participants — to fully comply with their output ceilings. The existing agreement targets a collective cut of 1.2mn b/d. There are lingering concerns within Opec about a lack of full compliance by Iraq and Nigeria.

The second option is to deepen the cuts by at least 400,000 b/d to 1.6mn b/d, according to Iraqi oil minister Thamir Ghadhban. No minister has confirmed that the 1.6mn b/d figure is an option on the table. But Ghadban said yesterday that some key Opec member countries are in favour of deeper cuts. He clarified today that Iraq had not initiated the proposal and said Baghdad supports a rollover of existing production quotas for the whole of 2020.

One Opec delegate told Argus today that "whatever Opec does", it faces a supply glut in the first half of 2020.

Forecasts point to demand for Opec crude falling by over 1mn b/d next year, with new non-Opec production far outstripping global oil demand growth.

The idea of a further 400,000 b/d cut was not endorsed by the Opec+ Joint Technical Committee when it met in Vienna on 2 December, two other Opec delegates told Argus.

A rollover and other options are on the table, one of the delegates said. But the market will require more dramatic action from Opec than simply extending the current deal until the end of June, he said.

Russia has still not publicly signalled its preference, but it is understood that Moscow remains unconvinced about deepening the existing cuts. This means Saudi Arabia, which is keen to keep Russia actively involved in market management strategy, may be inclined to opt for a rollover.

Riyadh can address the need for further cuts in the first quarter next year by overcomplying with its existing quota, as it has done regularly in recent months.

Saudi Arabia's oil minister Prince Abdulaziz bin Salman, who is representing his country at an Opec meeting for the first time since being appointed, has refrained from publicly signalling Riyadh's intentions and its assessment of market conditions ahead of the meeting.

The aim of the tight-lipped approach — not only from Prince Abdulaziz, but from Opec ministers in general — might be to avoid building up expectations. Another reason for Riyadh's reticence in signalling its intention is likely to be a desire not to influence oil prices as state-owned Saudi Aramco's initial public offering draws to a close tonight.