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OPEC Grapples with Growing Threats to Oil Deal

23 Jul 2017 1:19 pm
By Georgi Kantchev 

ST. PETERSBURG, Russia -- A group of OPEC members are gathering here with big oil-producing allies to discuss growing threats to an output deal that has failed to raise crude prices.

Saudi Arabian energy minister Khalid al-Falih cut short his vacation to come to St. Petersburg to meet with his Russian counterpart, Alexander Novak, said Mohammad Barkindo, the secretary-general of the Organization of the Petroleum Exporting Countries. The two men will preside over a gathering of several OPEC and non-OPEC producers Monday designed to shore up support for their efforts to limit global oil output.

"We will discuss the situation on the market," Mr. Novak told reporters.

Among the topics, he said, will be production from Libya and Nigeria. The two OPEC members, which were exempted from a deal struck last year to withhold about 2% of global oil supplies from the market, have recently raised output. Saudi Arabia is the de facto leader of the 14-nation OPEC group, while Russia is the world's top producer and leader of a faction of 10 non-OPEC producers that pledged to cut output.

The deal was intended to draw down a global oversupply of oil that sent prices to historically low levels. Instead, oil supplies have drained slower than expected and prices have remained mired below $50 a barrel.

"Market dynamics have been challenging," Mr. Barkindo told reporters. "They have been almost challenging established economic theory."

Mr. Falih arrived here Saturday and has taken meetings with delegations from Libya and Nigeria, which have been ramping up output. Both countries were left out of the production-cutting deal because civil strife had crippled their oil industries, but recent gains have led to calls to limit their output.

Mr. Falih has reviewed both countries' "recovery plans, their challenges, their targets," Mr. Barkindo said after meeting him at St. Petersburg's Four Seasons hotel. "He has been very involved."

Libya and Nigeria are part of a growing list of problems for the Saudi-Russia-led oil deal.

OPEC compliance has been slipping.

Iraq and the United Arab Emirates, two of OPEC's largest producers, haven't been meeting their output cut-pledges, J.P. Morgan Chase & Co. said in a report last week, making them "material drags on overall compliance." Saudi Arabia has picked up the slack, cutting more than pledged, but the kingdom in recent months has been pumping more to meet higher summer demand.

Ecuador's oil minister recently said his country had no plans to stick to its output-cut pledge because the country needed the revenue. Ecuador is a small producer, but its oil minister's unusual public stance drew a phone call from Mr. Falih, who got the country to issue a statement reiterating its support for the output deal.

"Ecuador's move underscores the sharp divergence in the economic fortunes of the sovereign producers, with the most cash strapped states in urgent need of financial relief," said Helima Croft, head of commodity strategy at RBC Capital Markets, in a note to clients.

Mr. Novak said Sunday that his country had cut oil production in line with what it promised -- about 300,000 barrels a day. It marks the first time Moscow has moved with OPEC to limit oil supplies.

Saudi Arabia's goal this week is to "convince the other members that by sticking to the deal all OPEC producers will benefit from higher revenues," said Giovanni Staunovo, commodity analyst at the Swiss bank UBS.

Mr. Staunovo said he expects the output deal to stay together until its agreed-upon end date next March. But he said, "there is a 20-30% probability of a breakdown."

"Should this happen, countries bound by the deal would likely immediately ramp up production back to predeal levels, the oil market would move from a deficit into oversupply, and prices may plunge heavily, " Mr. Staunovo said.

Analysts said it was unlikely that OPEC and Russia would announce any major news Monday. The meeting won't have most members represented, and the group extended its current agreement less than two months ago.

Mr. Barkindo said Monday's meeting could result in recommendations for OPEC and its allies to consider in the future. He said overall compliance with the deal since January had been "excellent."

"The rebalancing process may be going at a slower pace than we earlier projected but it's on course. It's bound to accelerate in the second half," he said.

Write to Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

July 23, 2017 09:19 ET (13:19 GMT)

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