Saudi opposition to extending OPEC deal has softened, says CE

OPEC’s six-month production agreement is more likely to be extended now, with the recent dip in oil prices and the weakening of Saudi opposition to prolonging the deal, London-based Capital Economics said in a note on Tuesday.

However, there remain many obstacles to overcome, the report said, adding that “the kingdom will almost certainly not agree to undertake deeper cuts.”

OPEC’s latest monthly oil market report shows that Saudi Arabia continued to comply with the producer group’s deal in February.

OPEC and non-member oil producers, led by Saudi Arabia and Russia, agreed last December to cut oil production by a combined 1.8 million barrels per day (mbd). Under the deal, OPEC pledged to trim output by 1.2 mbd to 32.5 mbd, while non-member nations agreed to cut 558,000 barrels per day.

According to secondary sources, Saudi crude production fell to 9.8 million barrels per day (mbd) in February from nearly 9.9 mbd the previous month, below its quote of 10.06 mbd.

“Saudi Arabia has continued to comply with its side of November’s OPEC agreement and recent comments from policymakers suggest that the Kingdom’s opposition to extending the deal beyond June is easing,” CE said.

“While this increases the chances of the deal being rolled over, poor compliance from Russia and signs that US shale output is picking up mean that there are still significant hurdles to overcome and the kingdom is likely to resist any calls for more aggressive action.”

The latest comments from Saudi oil minister Khalid Al Falih suggest that policymakers have softened their stance against extending the OPEC deal, the consultancy said.

Earlier in the year, Al Falih had said that there would be no need for the OPEC production cuts to be rolled over beyond June, when the deal is set to expire.

However, at a major energy conference last week, the minister said OPEC would examine the effectiveness of the deal before deciding whether to extend the cuts.

“This change in tone appears to have been driven by fears that global oil stocks are not falling as quickly as expected,” CE said.

However, while it is more likely that the deal could be renewed beyond the initial six months, Saudi Arabia is unlikely to take more aggressive action, particularly against non-compliance by other oil producing countries.

Meanwhile, there are indications that higher oil prices are encouraging US shale producers to boost output. US drillers added eight oil rigs in the week to March 10, bringing the total count up 617, according to data from energy services firm Baker Hughes.

“On the back of this, OPEC once again revised up its forecast for non-OPEC supply this year. This may reignite Saudi concerns about ceding market share to other producers,” CE concluded.