Opec and Russia are on course to increase cuts in supplies by 500,000 barrels a day as the world’s biggest oil producers seek to give a lift to a sluggish crude market.
Alexander Novak, Russia’s energy minister, said on Thursday that a committee of ministers, which also includes Saudi Arabia, had recommended that producers deepen existing production cuts of 1.2m b/d to 1.7m b/d.
The curbs, which still need to be formally agreed later on Thursday by Opec and by other nations including Russia on Friday, would last until at least March 2020, when the current 1.2m b/d deal expires.
Talks continued into the evening. Ministers were still in closed-door discussions at the Opec secretariat at 9pm Vienna time, when they should have been at a gala dinner to celebrate the success of the Opec+ alliance.
Rising hopes of a cut helped boost the oil price on Thursday, with Brent crude, the international benchmark, up almost 5 per cent to $63.50 a barrel over the last two sessions.
The move comes after analysts warned that the crude market could be heavily oversupplied in the first half of next year, and as the strength of the global economy is undermined by the US-China trade war.
It also comes as Prince Abdulaziz bin Salman, the Saudi energy minister who was appointed in September, tries to stamp his authority on the group and pushes for greater compliance among producers.
Traders and analysts attending the meeting in Vienna have cautioned that Saudi Arabia’s strategy does not appear designed to push prices significantly higher, saying that the cartel is looking to reassure the market rather than having any grander ambitions such as raising the price to $70 or $80 a barrel.
Saudi Arabia had already been pumping far below its production target before the attack on some of its critical oil facilities in September.
Analysts have warned that the cut eventually announced may not actually remove many more barrels from the market, given Saudi Arabia has already throttled back output since surging production shortly after recovering from the raids.
Bill Farren-Price at RS Energy said the announcement of a deeper supply cut would give a “psychological boost” to the oil market.
“But the detail of what this cut will actually entail will be crucial to its longer term impact on the market,” Mr Farren-Price added. “It looks like the Saudis have extracted some concessions around greater compliance from other members in return for reducing their own output. But it’s not clear if they will go below the level they were producing before the Abqaiq attack.”
Brent crude has traded near $60 a barrel for much of 2019, lower than its average level last year but without testing the depths seen in 2015 and 2016. Then, crude collapsed to below $40, causing widespread hardship for oil-producing countries.
Amrita Sen at Energy Aspects said Opec and its allies — particularly Russia, which has partnered with the group since 2016 — would be wary of throwing a lifeline to the US shale industry, which has started to show signs of slowing after years of bumper growth. The so-called Opec+ alliance has a current target of reducing output by roughly 1.2 per cent of global supply. A 500,000 b/d increase could take that to about 1.7 per cent.
Ann-Louise Hittle at Wood Mackenzie said there was a risk, however, that the market might discount the full effects of the curbs if they were predicated on greater compliance from countries such as Nigeria and Iraq, which have tended to pump above their target.
“The impact on production would be limited because current adherence from producers such as Iraq and Nigeria has been light and they are unlikely to rein in output further,” said Ms Hittle. She added that the market would want to see the deal extended at least into the second quarter of next year.
On Thursday shares in Saudi Aramco, the state oil company, were priced ahead of the company’s long-awaited market flotation, raising $25.6bn. That makes the deal the world’s largest initial public offering, giving the company a valuation of $1.7tn. A stronger oil price would help support the shares in the early days of trading.
Three analysts briefed on Thursday’s Opec discussions said they suspected the group could announce an even larger cut — perhaps as much as 800,000 b/d.
Speculation about this strategy, which has been dubbed “the Saudi surprise”, gained momentum earlier in the day.
Analysts pointed to a lack of public comments by delegates, saying it could represent an attempt to build to a revelation that could shock the market. Bob McNally at Rapidan Energy Group, who previously advised the White House on energy policy, said there was a “high likelihood” of a deeper cut.