OPEC talks end without oil-cuts deal as Russia holds back

By Javier Blas, Salma El Wardany and Elena Mazneva on 12/6/2018

LONDON and CAIRO (Bloomberg) -- OPEC ended talks without a deal on oil production cuts for the first time in nearly five years as Russia flexed its muscles by so far refusing to commit to the big output curb that Saudi Arabia is demanding.

After two days of talks in Vienna, Saudi Energy Minister Khalid Al-Falih said he isn’t confident of an agreement when the Organization of Petroleum Exporting Countries meets again with its allies on Friday. A proposal for a combined OPEC and non-OPEC cut of 1 MMbopd was left dangling in uncertainty.

“Not everybody is ready to cut equally,” Al-Falih told reporters in Vienna. “Russia is not ready for a substantial cut.”

The failure to secure a deal is the latest example of how OPEC is under pressure from forces that are re-drawing the global oil map, leaving it increasingly dependent on the support of non-member Russia. In a striking development, the U.S. government revealed that it turned into a net exporter of petroleum for the first time in 75 years last week thanks to the shale boom.

The oil market quickly reacted negatively to OPEC’s setback, with Brent crude tumbling as much as 5.2% to $58.36/bbl in London.

Much has changed for OPEC since 2016, when Russia and Saudi Arabia ended their historic animosity and started to manage the market together. The alliance has transformed the cartel into a duopoly in which the Kremlin is asserting its power.

As ministers sat down at OPEC headquarters, Russian Energy Minister Alexander Novak flew to St. Petersburg to meet President Vladimir Putin to decide on their country’s contribution. If the group’s most important partner in the OPEC+ alliance decides to make a sizable cut, the cartel would follow up.

“The impression that the group can’t really come to a decision without first checking with Moscow is going to be difficult for some members to swallow,” said Derek Brower, a director at consultant RS Energy Group. “The market won’t care if tomorrow they manage a sizable cut with proper metrics, but that’s still a big if.”

Elusive agreement

Earlier on Thursday, ministers were discussing a proposal to curb combined OPEC and non-OPEC output by about 1 MMbpd, a delegate said. That was in line with Saudi Arabia’s preference for a moderate reduction that wouldn’t “shock the market.” The kingdom is under economic pressure after a collapse in oil prices last month, yet it’s seeking to walk a fine line between preventing a surplus next year and appeasing President Donald Trump.

While Middle Eastern producers need high oil revenues to pay for government spending, sensitivities are different in Russia, which is running a budget surplus and benefits from a weak ruble that mitigates the impact of lower crude prices in dollars. The government is concerned about the impact of higher prices on consumers, stoking discontent with economic policy, according to one Kremlin official.

Although Russia, the largest producer in the OPEC+ group, had agreed to a cut in principle, the eventual size of their contribution remained undefined through this week’s talks in Vienna. In private conversations earlier in the week, OPEC delegates said that Saudi Arabia had favored a Russian cut of about 300,000 bopd, but Moscow was seeking a smaller reduction of about 150,000.

Before Thursday’s meeting, Al-Falih said that “if everybody is not willing to join and contribute equally, we will wait until they are” and he was prepared for the consequences of no deal.

Sticking points

Another sticking point in the talks was Iran’s contribution, a delegate said. The Gulf nation is currently subject to U.S. sanctions and as such won’t participate in any curbs, Oil Minister Bijan Zanganeh said. Other members said it should participate, said a delegate.

OPEC ministers were also discussing whether to exempt Libya and Venezuela from making production cuts, another delegate said. Those countries, along with Nigeria, were opposed to participating in a supply reduction, the delegate said.

"Some countries will struggle because their economies are very constrained" and Nigeria itself could only manage a small cut, Minister of State for Petroleum Resources Emmanuel Kachikwu said in a Bloomberg television interview before the meeting.

Beyond its internal disputes, OPEC is also contending with vociferous opposition from the U.S. president, who’s taken to using his Twitter account to berate the group’s policies and sees low oil prices as key to sustaining America’s economic growth.

While ministers met on Wednesday, Trump tweeted that the “world does not want to see, or need, higher oil prices!” Thursday’s inconclusive talks could end up giving the president what he wants.

OPEC will first reconvene on Friday without outside partners, at 9:00 a.m. in Vienna, then at 12:00 p.m. local time the group meets with its non-OPEC allies, including Russia, a delegate said.

“The risk of OPEC+ not being able to agree on a deal was always very high and this will now pressurize prices significantly lower,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. “There is no anchor for the market.”
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