Viennese whirl

Well, jet fuel demand is getting a boost from the upcoming Opec and Opec-non-Opec gatherings in Vienna. Venezuela’s president Nicolas Maduro and oil minister Eulogio Del Pino have taken to the skies to lobby anyone who will listen on the need for production restraint, although cynics likened the jaunts to the spouse who deals with a domestic dispute by taking the dog for a walk. Russia’s oil minister Alexander Novak was cosying up chez-Saud earlier this week, and Opec secretary-general Mohammed Barkindo spent this morning trying to get Baghdad’s buy-in to the Algiers proto-deal.

The party invitations to non-Opec producers have gone out but the Opec secretariat is coy about saying to whom — lest the tally of attendees disappoints — although Venezuela gave it as: Russia, Azerbaijan, Kazakhstan, Oman, Egypt, Bahrain, Colombia, Mexico, Trinidad and Tobago, Bolivia, Norway and Canada.

Russia has committed itself to a high-level delegation. Azerbaijan has said it supports the process and committed itself to not producing any more of the crude that it cannot produce anyway. Kazakhstan says it has yet to decide whether to go or stay home and wash its hair but it has said it has no plans to limit its production as it concentrates on ramping up output from the sleeping giant of Kashagan. Oman will go and, on precedent, will make a token gesture but won’t want to dip below its hard-won 1mn b/d total liquids production level. Egypt may also offer a trifle, particularly if that brings a restoration of Saudi aid. Bahrain will hitch a ride in the back of the Saudi cab and likely offer a few tens of thousands of barrels a day. Norway today said it had made its excuses. Canada? As if Ottawa would seek to control the output of private-sector companies or would risk a bust up with provincial governments.

And the Latin Americans? Non-Opec Brazil, where sub-salt production is breaking one record after another, is the only country that currently matters in terms of near-term supply growth. But Brasilia is more interested in attracting oil companies to upcoming licensing rounds. And there is no love lost between the new business-oriented government there and Caracas, the region’s indefatigable Opec cheerleader. Perhaps that is why it’s not on the invitation list.

Mexico’s crude production shows no sign of snapping a long decline trend, and even if that were to happen, it doesn’t care to engage with Opec anyway, lest it send the wrong signal to potential investors. Ditto Colombia.

We’ve known all along that the belle of the Opec-non-Opec ball would be Russia. With September output of over 11mn b/d and a nine-month average that’s not much less, its potential contribution to a production restraint deal matters more than all the rest put together. They may throw some pennies onto the collection tray, but no more.

And what will Russia offer? Messages from Moscow have not been entirely consistent but it’s clear that Russia wants a deal that lasts no more than six months and that it will agree to announce a freeze but not a cut in output. That leaves two questions outstanding: a freeze from which recent record high? And a freeze that will be observed or one that will be flouted (like last time Moscow did a deal with Opec)?

Venezuelan oil minister Eulogio Del Pino said Caracas is trying to collect pledges adding up to a production constraint of 500,000 b/d from non-Opec producers. That’s more than double Opec’s current forecast of non-Opec supply growth in 2017. If it’s promises rather than barrels that are being counted, that may be do-able. Let’s say Russia agrees to freeze at a January-August average of around 10.8mn b/d. That can be presented as taking 300,000 b/d off global production compared with September. Throw in 50,000 b/d from both Oman and Bahrain, something from Egypt, add a little jiggery-pokery and, hey presto, we have a PR total of half a million barrels.

Aggregated secondary source estimates used by Opec’s secretariat put September Opec output at 33.4mn b/d, implying that between 400,000 b/d and 900,000 b/d would have to go away if the Algiers provisional agreement to hold production at a yet-to-be-agreed point in the 32.5mn-33mn b/d range is to be consummated. Where in that range is to be agreed by an Opec technical committee on the day before the Opec-non-Opec jamboree. Del Pino says 700,000 b/d has been committed.

Again, looking at pledges rather than practice, that does the trick. And it probably does it without the participation of Iran, Nigeria, Libya — or Iraq. No exemption has been announced for the first three, but the Saudis are minded to offer some leniency, saying the countries could have special dispensation to produce at “maximum reasonable levels that have recently been achieved”. As to Iraq, it is kicking against secondary source estimates of its output over recent months — and hence the level at which it would have to freeze or cut — and demanding a basis of 4.7mn b/d. Unless Barkindo came away from Baghdad today with something more concrete than the contents of the Opec press release, Iraq looks unlikely to be participating in the deal. This will infuriate the Saudis and the Venezuelans but they may be able to swallow it by accepting that the current push in the war effort justifies exemption.

So, the notional 700,000 b/d will come from Saudi Arabia, plus its Gulf Arab allies, plus Venezuela. The problem is not going to be getting to that number but keeping at the 32.5mn-33mn b/d. Iraq is not the only country arguing that secondary sources have underestimated their production. If those secondary sources lift their estimates, further barrels will have to be found if the ceiling is to be retained. And, if Iran, Libya, and Nigeria are either exempt or treated leniently then their (likely) rising production will undermine a ceiling agreement to which they are not party.