Algiers deal would match 2017 call on Opec

OREANDA-NEWS. September 29, 2016. Opec ministers meeting informally in Algiers today have come up with a tentative proposal that could see their combined production meet the forecast call on Opec crude in 2017, and allow both Saudi Arabia and Iran to say their conditions for production restraint have been met.

Current president of the organisation, Qatar's oil minister Mohammed Saleh al-Sada, stressed that the proposed deal is intended to speed a market rebalancing that is underway, but at a slower speed than had previously been expected. "We need to bring forward the rebalancing of the market," he said. "And we came up with a way forward that is to consider targeting 32.5mn-33mn b/d target, and we agreed on having a high level technical committee of all Opec members to study the mechanism of sharing the production at individual country's level, from now till November to be presented at the next meeting in Vienna."

The intervening period will also give Opec time to try to get buy-in from key non-Opec producers, such as Russia.

A press release issued after the meeting re-emphasised a point made by several ministers and Opec official in recent days, that they regard the main culprit for slow rebalancing as being very high stock levels.

"It is not advisable to ignore the potential risk that the present stock overhang may continue to weigh negatively well into the future, with a worsening impact on producers, consumers and the industry," it said. The proposed deal is intended to force a stock drawdown.

But the devil may be in the detail as there is as yet no agreement on how the implied cut in production will be distributed, from what date the new ceiling will take effect, how long the deal would last, or whether countries facing civil conflict would be exempted. The length of the deal will be of concern to Iraq, which earlier said it would only agree to a constraint that lasted a handful of months. Libya and Nigeria will want room to bounce back from low production caused by political tumult.

The lower end of the proposed production range tallies with Opec's most recent forecast for a call on its crude next year — 32.5mn b/d. But estimates of the current crude overhang are as high as 2mn b/d, so the impact of the proposed cut in production is moot.

It's not clear how big would the cut, if implemented, may actually be. Iran's oil minister Bijan Namdar Zanganeh put it at almost 700,000 b/d. He reached that by assuming the cut will be to 32.5mn b/d rather than 33mn b/d and accepting Opec's collation of secondary source estimates for August production of 33.25mn b/d. Argus puts August production at a higher 33.48mn b/d.

Earlier today, Iran's Zanganeh signalled that a November deal was possible when he said that current Iranian production is 3.85mn b/d and another 150,000 b/d would be added by November. This would take output to the magic 4mn b/d that is the pre-sanctions level Tehran has insisted it must achieve before agreeing to participate in any output restraint.

Saudi Arabia has publicly demanded since April that Iran must participate in a deal if Riyadh was to sign up. That pre-condition can now be met.

"It was a very good day for Opec," Zanganeh said after the meeting. "I am happy after two and a half years we had a very constructive agreement in Opec, which means Opec can overcome very difficult situations."