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OPEC Grapples with Growing Threats to Oil Deal -- 2nd Update

23 Jul 2017 4:29 pm
By Georgi Kantchev 

ST. PETERSBURG, Russia -- OPEC said Sunday it was having "intensive consultations" ahead of a gathering Monday with big oil-producing allies about 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.

One of the main reasons is largely out of OPEC and Russian control: U.S. producers.

Shale drillers -- who work on shorter-term projects than traditional oil producers -- took advantage quickly when oil prices briefly rose last year after the OPEC deal, sending more crude into global supply. They have also learned to drill at lower prices, and U.S. production has maintained its upward swing even as prices have remained depressed this year.

OPEC members have repeatedly ruled out making deeper production cuts. While that action would likely raise prices, it would probably also allow shale drillers to ramp up output even more, reducing OPEC market share and eventually killing any rally.

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

Mr. Falih doesn't always attend meetings of the committee that is gathering Monday to assess compliance. His presence suggests that OPEC and its allies like Russia see the ineffectiveness of its production cuts as a profound problem.

Mr. Barkindo said Mr. Falih left his vacation because of the "strategic importance" of this week's meeting and the "high expectations of the times."

The Saudi energy minister 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.

It was part of a flurry of activity ahead of Monday's meetings. Mr. Falih was also scheduled to meet with officials from OPEC member Algeria, while Kuwait's oil minister, Issam A. Almarzooq, was holding "a series of phone consultations over the weekend with oil ministers from OPEC and non-OPEC producing countries," OPEC said in a news release describing the activity as "intensive."

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.

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.

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.

Benoit Faucon in London contributed to this article.

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

(END) Dow Jones Newswires

July 23, 2017 12:29 ET (16:29 GMT)

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