The Organisation of the Petroleum Exporting Countries discussed cutting its oil output by a further one to 1.5 per cent when it met last week, three sources familiar with the matter said, and could revisit the proposal should inventories remain high and continue to weigh on prices.
Opec and non-member producers ultimately decided at their May 25 meeting to extend their existing supply-cutting agreement for nine months, although oil ministers including Saudi Arabia’s Khalid al-Falih confirmed deeper curbs had been debated.
One of the sources said the idea floated was to widen Opec’s supply cut by about 300,000 barrels per day (bpd). That would equate to a further curb of about one per cent of April output of nearly 32 million bpd and bring Opec’s total pledged cut to 1.5 million bpd, from 1.2 million bpd.
“They wanted to do some scenarios and get around 300,000 bpd of extra cuts to be distributed among everyone,” the source, who declined to be identified, said. “But I think they decided to wait and see how the market will react first.”
The initial price reaction to Opec’s May 25 decision was one of disappointment that producers had not deepened their cuts. Brent crude fell five per cent to below $52 a barrel and was trading near there yesterday, half its level of mid-2014.
Opec officials nonetheless hope an inventory glut will ease in the next few months as market fundamentals move closer to balance. Opec is not scheduled to meet again to set policy until November.
“By the next meeting, if prices and the situation remain like this, they will have to do something ... Everyone will be on board (for more cuts) if prices remain like they are now,” the source said, adding that he expected the market and prices to improve by the third quarter.
A second source familiar with the matter said “everything is possible”, when asked whether the option of a deeper cut could be revived.
A third source, an Opec delegate, was sceptical that a larger cut would be agreed on by all parties, including non-Opec producers. “I doubt it,” that source said. “There was a proposal for a deeper cut, but it didn’t work.”
A fourth source, also an Opec delegate, was sceptical for the same reason.
“To ensure a proposal can be feasible, you need to see who can buy in,” that delegate said.
Opec, Russia and other producers agreed last year to cut production by 1.8 million bpd for six months starting on January 1.
Oil prices have gained from the pact but stockpiles remain high and production from non-participating countries, including the US, has been rising, keeping crude below the $60 that top exporter Saudi Arabia would like to see this year.
Riyadh is preparing to list around five per cent of its national oil company Saudi Aramco in 2018 and wants higher oil prices ahead of the initial public offering (IPO) for a better valuation, industry and Opec sources have told Reuters.
“I think the Saudis have a target oil price for the Aramco IPO,” the first source said. Falih, however, said after Opec’s meeting that the IPO did not affect the decision to extend the duration of the supply cut.
A deeper cut, along with extending the curbs for various lengths of time, were among the scenarios reviewed by an Opec panel, the Economic Commission Board, days before the Opec ministerial meeting.
Falih, who currently holds the Opec presidency, said that keeping the existing cuts for another nine months was the best outcome.
On Wednesday in Moscow, Falih reiterated his country’s position to do “whatever it takes” along with Russia to help stabilise the market, signalling an open-ended policy to reduce the inventory overhang.