Saudis Said To Take "Big Hit" On Output As OPEC "Close" To Condition Deal Involving Russia

Oil continued to rise higher, now over 7% sending Brent above $50 for the first time since October, after Saudi Energy Minister Khalid al-Falih said on Wednesday OPEC was close to clinching a deal to limit oil output, adding Riyadh was prepared to accept "a big hit" on its own production and agree to arch-rival Iran freezing output at pre-sanctions levels. The comments was interpreted as a compromise by the Saudis who in recent weeks insisted that Iran fully participate in any cut.

OPEC was said to be "close" to reaching a deal to cut supply by 1.4 mmbpd, assisted by a 600kbpd cut coming from non-OPEC nations. However, as Reuters adds, if such a deal is agreed it would be conditional on non-OPEC involvement as OPEC would need non-OPEC members, such as Russia to agree to the 600kbpd and may require another meeting as early as December.

This may be problematic as according to a Bloomberg headline blast, Russia would be willing to consider a 200kbpd cut if there is an OPEC deal, less than the 400kbpd number floated earlier by an OPEC "source", suggesting that any subsequent meeting may once again prove "problematic."

Furthermore, assuming OPEC does agree to a 1.4mmbpd production cut, it is still unclear how it will be achieved and if indeed, the Saudis will be forced the bulk of the production cut.

While the details so far remain unclear, Falih also said that OPEC was focusing on reducing output to a ceiling of 32.5 million barrels per day, or cutting by more than 1 million bpd, and hoped Russia and other non-OPEC members would contribute a cut of another 0.6 million bpd.

"It will mean that we (Saudi) take a big cut and a big hit from our current production and from our forecast for 2017. So we will not do it unless we make sure that there is consensus and an agreement to meet all of the principles," Falih said.

Hedging in case no deal were to emerge, the Saudi said that even if OPEC failed to reach a deal, the market would slowly recover: "We believe that non-OPEC growth has reversed and also most of the OPEC growth we’ve seen is already behind us," he told reporters. "If we can’t come to an agreement, then the other scenario of rolling over and waiting for the market to recover on its own is not a bad outcome."

As previously reported, yesterday Iran wrote to OPEC saying it wanted Saudi Arabia to cut production by as much as 1 million bpd, more than Riyadh was willing to offer. However the tone changed on Wednesday. "I'm optimistic," said Iranian Oil Minister Bijan Zanganeh, adding there had been no request for Iran to cut output. He also said Russia was ready to reduce output.

"Moscow have agreed to reduce their production and cut after our decision," Zanganeh said, although even that statement remains in question as it is unclear just how much Russia would cut with Iran floating a number of 400kbps, which has since been reduced to 200kbpd by the Russian energy minister.

A likely outcome, then, is that OPEC will announce a 1.4mmpd conditional cut, and will also announce a subsequent meeting when a pledge to cut by Russia will also have to be ratified. Meanwhile, US shale companies are already preparing to pump more courtesy of today's oil surge even as global demand - most notably out of China - continues to decline.

Finally, there is the question of deal compliance and just who within OPEC will monitor the other members to keep within the agreed upon production quotas: considering everyone in the cartel has a conflict of interest to keep prices as high as possible by representing as low an output as possible, this too will be, well, problematic.