Vienna walkout in the offing?

Are the odds on a pre-planned spontaneous walkout by the Saudi delegation in Vienna narrowing?

Some points to consider.

First, on 25 November an “Opec delegate” told Argus that this week’s meeting of ministers might fail to reach an output restraint deal. In subsequent days that message has been reinforced, with Saudi oil minister Khalid al-Falih telling reporters at the weekend that the market is rebalancing without Opec action and that Riyadh has other options.

Second, while Iraq and Iran are arriving in Vienna in plenty of time for rounds of bilateral meetings to try to convince other delegations that their positions are just and reasonable, the Saudis have opted for a last-minute arrival. This suggests they are in no mood for negotiation and will adopt a stance of take it or leave it.

Third, as recently as this morning, as the technical committee meeting convened, Iran’s position had not softened. It still insisted it will not cut from current levels or freeze, even if it is approaching the magic 4mn b/d level. While some progress has been made on other matters of contention, backchannel negotiations between Riyadh and Tehran have failed. It was Iran’s wholly expected, wholly consistent refusal to freeze or cut until it reached pre-sanctions output levels that led to the unexpected Saudi walkout in Doha in April. Iranian oil minister Bijan Namdar Zanganeh said two days ago that he is optimistic a deal can be done. But that was the line in Doha too, and at all times since — a deal that exempts Iran.

Is there any cheer for proponents of a deal? Well, some.

Iraq’s position has softened. Last week, Iraqi prime minister Haider al-Abadi said Baghdad would cut output as part of an Opec deal. Previously, it had argued — although not consistently — that the state of war qualified it for the exemption that Libya and Nigeria may be offered. Subsequently, it has even said in private that it might countenance using secondary source figures as the basis for a small cut from October production. Argus understands it has floated the idea of holding output for the period of a deal at 4.7mn b/d on the basis of its own October figures — an implied cut of 76,000 b/d — or 4.5mn b/d on the basis of secondary sources, an implied cut of 61,000 b/d. That is well short of the 4-4.5pc cut that the Saudis want, but it is movement.

Then, while we now know more about the proposal that Algiers is touting around the world’s oil producers — six months, with Opec reducing output by 1.1mn b/d and non-Opec by 600,000 b/d — we don’t know what it proposes for Iran. Algiers and Tehran have long been allies in Opec. And the Algerians are master diplomats. It’s just possible they have come up with a formula that will save faces all round.

Lastly, how long is Riyadh willing or able to withstand lower oil prices? Failure to achieve in Vienna even a short-term, unspectacular cut or freeze, likely honoured more in the breach than the observance, will set the stage for lower prices — $35/bl in Algerian oil minister Noureddine Boutarfa’s view. There is no suggestion that Saudi Arabia would go bust if prices bump along the bottom for another year or so. But political and social pressures would grow. And, while bids for a stake in Aramco will not be calculated solely on conventional accounting principles, valuations of the company ahead of the planned 2018 partial IPO would be a lot lower at $35/bl than at $60/bl.

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