By Javier Blas and Grant Smith
LONDON, England, (Bloomberg) — OPEC+ is set to extend production cuts to prop up the oil market after a breakthrough in high-stakes negotiations, and the cartel could meet as soon as this weekend to sign off on the deal.
After almost a week of wrangling, OPEC+ leaders Russia and Saudi Arabia clinched a tentative deal with holdout member Iraq, according to a delegate. The pair were pushing Iraq to stop shirking its share of cuts and even to compensate for failure to comply with cuts in the past.
The agreement – though still to be ratified – means OPEC+ will extend its record production curbs for another month until the end of July. Brent crude, the global benchmark, edged higher, nearing $40 a barrel.
The 23-nation partnership between the Organization of Petroleum Exporting Countries and other major producers has helped engineer a doubling in Brent prices since April. The oil price surge has revived the fortunes of major energy companies like Exxon Mobil and Royal Dutch Shell Plc, and reduced the fiscal hole in the budgets of oil-rich nations.
Failure to reach an agreement this month could have brought millions of barrels of oil onto the market, undermining a tentative recovery as the coronavirus lockdown eases. With U.S. shale production starting to come back online, OPEC’s careful management of the demand recovery is crucial.
The kingdom and the Kremlin, who were on opposite sides of a vicious price war until a peace deal in April, are now united against those in OPEC who have consistently failed to shoulder their share of the burden. Russia, a habitual laggard, has complied punctiliously with the historic deal brokered by President Donald Trump in April, and wants to make sure others are too.
“Reunited in leadership of OPEC+ and grimly facing many more months, if not years, of oversupply, Russia and Saudi Arabia had little to lose and much to gain by imposing concrete measure to improve compliance by the laggards, especially Iraq,” said Bob McNally, founder of consultant Rapidan Energy Group and a former White House official.
The details of the deal between OPEC+ and Iraq on compliance weren’t clear late on Thursday. A delegate said countries were waiting for a formal letter from Baghdad spelling out the details before calling for an official meeting. OPEC+ is used to dramatic glitches endangering deals at the last minute, so delegates said nothing would be agreed until formal communications take place.
Tougher conditions will be difficult for Iraq to accept. It made less than half of its assigned cutbacks last month, so compensating fully would require it to slash production by a further 24 perent to about 3.28 million barrels a day, according to Bloomberg calculations.
For a country still rebuilding its economy following decades of war, sanctions and Islamist insurgency, that’s a tall order. The government risks a backlash from parliamentarians and rival political parties by acceding to foreign pressure and foregoing crucial oil sales.
Three other nations – Angola, Kazakhstan and Nigeria – also produced above their OPEC+ quotas in May. The three had earlier on Thursday already agreed to bring their production in line with the agreement.
Enforcing better compliance among OPEC+ nations has been a motif since Saudi energy minister Prince Abdulaziz bin Salman was appointed.
In his first public outing after becoming energy minister, in Abu Dhabi last September, the prince was literally applauded for securing loud pledges of atonement from Iraq and Nigeria.
His tenure has also been stormy. In March, the prince’s attempt to force Russia to make deeper output reductions backfired spectacularly, splintering the entire alliance and igniting a destructive price war.
Two months ago, Prince Abdulaziz’s achievement in successfully restoring the OPEC+ coalition and forging an agreement for historic production cuts was overshadowed – and delayed – by a spat over Mexico’s contribution.
The final deal in April set out historic cuts of 9.7 million barrels a day, or roughly ten percent of global oil supplies, to offset the unprecedented collapse in demand caused by the virus lockdowns. Then a few weeks later, Saudi Arabia and its closest allies in the Persian Gulf promised additional supply restraint of 1.2 million barrels a day in June.
If a new accord is signed this weekend, the impact on the oil market could be dramatic. After the massive oversupply earlier this year, Russian energy minister Alexander Novak predicts there could be a supply deficit of 3 million to 5 million barrels a day next month, Interfax reported. That’s roughly in line with projections from an OPEC committee that met on Wednesday, a delegate said.
That would provide a stronger foundation for the crude price recovery, and also allow the cartel to start chipping away at the billion-barrel stockpile that’s built up during the crisis.