Oil prices fell as much as 5 per cent on Thursday after Saudi Arabia said Opec and its allies were working towards a smaller production cut than many traders were anticipating, raising fears the cartel is struggling to respond to a renewed supply glut.
Khalid al-Falih, the kingdom’s energy minister, told reporters ahead of a meeting of oil ministers in Vienna that Opec and allies, including Russia, were still working towards a deal by Friday to arrest the 30 per cent slide in oil prices since October.
But he said the preference for Saudi Arabia, Opec’s de facto leader and the country facing the most pressure from US president Donald Trump to keep prices low, was for a “sufficient cut but not overly large” reduction. He added that removing 1m barrels a day between Opec and non-Opec countries “would be adequate”.
This comes even as oil analysts say at least 1.3m to 1.5m b/d would be needed to balance the market and bolster oil prices next year.
Brent crude fell as much as 5 per cent to about $58, before stabilising just above $60 a barrel.
“With the market looking for a big production cut number, there’s a little disappointment,” said Giovanni Serio, global head of research at Vitol, the world’s largest independent oil trader, who is attending the meeting in Vienna.
Saudi Arabia said it was calling for contributions from all countries, including Russia as well as those that were exempt from previous deals such as Libya and Nigeria, saying the deal should be “fair and equitable”.
When asked if a deal might not be reached, Mr Falih said all options were on the table, but added that Russia — the largest exporter outside of the cartel, and seen as crucial to reaching a deal — has “made a promise” to cut.
As the meeting progressed one delegate told the Financial Times that a broad agreement had been reached between Opec members to cut output, but deliberations over the exact size of the reduction were ongoing.
There is still uncertainty over how far Russia is prepared to go. Energy minister Alexander Novak has warned severe winter weather hindered the country’s ability to curb output in Siberia until later in 2019. “For us it is much more difficult to cut,” he told Russian state news agency Interfax on Thursday.
Brent crude has fallen more than 30 per cent since October as the US issued sanctions waivers to big buyers of Iranian oil, while output from global producers, including US shale companies, has surged.
The planned output cuts come despite pressure from Mr Donald Trump, who has advocated for continued high levels of production, describing lower oil prices as a “tax cut” for consumers.
At the last meeting of oil ministers in June, Saudi Arabia pledged to relax oil curbs that had been in place since January 2017, to compensate for a drop in Iranian exports as US sanctions kicked in, taking its output to record levels above 11m b/d.
Mr Falih met Brian Hook, a US state department official, in Vienna on Wednesday, in a move that has antagonised Saudi Arabia’s regional rival Iran. Mr Hook briefed the kingdom on its sanctions policy for the coming months.
“Opec is an independent organisation and is not part of the US Department of Energy to take orders from Washington,” Bijan Zanganeh, Iran’s oil minister, told state news agency Shana.
Saudi Arabia’s decision making has been complicated by pressure from the US, its key western ally. Mr Trump’s push for lower prices comes as he has backed Saudi Arabia’s Mohammed bin Salman, despite questions over the crown prince’s involvement in the killing of Washington Post journalist Jamal Khashoggi.
Worries about a global economic slowdown that could hit oil demand have also weighed on prices, raising concerns for big producer countries that rely on export revenues to fill government coffers.
Bob McNally, at Rapidan Energy Group, said discussions were ongoing and Saudi Arabia-led Opec might be willing to curb its production by higher levels if Russia showed real willingness to contribute, possibly pursuing a collective cut of up to 1.3m b/d. Russia will lead non-members such as Kazakhstan in a second meeting with Opec ministers on Friday.
Mr McNally said he expected Mr Trump to keep up the pressure on Opec, being able to hail it as an economic victory for his base. “Trump is not going to let go,” he said. “Since the [US midterm] election, he’s moved from preventing price spikes to looking for delivering a ‘tax cut’.”
The two-day ministerial gathering has drawn even more attention than usual from hedge funds and major oil traders given the uncertainty of its outcome and its potential to significantly alter the direction of oil prices in the coming months
It is widely seen as the most important gathering since the end of 2016 when Saudi Arabia, Russia and other global producers first agreed on collective action to end a multiyear energy downturn.
“The market right now needs certainty, not nuance,” said Mike Bradley, energy strategist at Tudor, Pickering, Holt & Co. “They’re going to have to come up with something a little more explicit.”