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Saudi Arabia discussed oil output cut with traders ahead of Opec

Kingdom sought views on likely market reaction should deal fail.

 

Saudi Arabia convened private talks with the world’s largest oil traders in Vienna before Opec’s crunch meeting on whether to cut oil output, seeking views about the likely market reaction should they fail to clinch a deal, it has emerged.

 

Mark Couling, head of crude oil at Vitol, the world’s biggest independent oil trading company, was invited to Vienna by the Saudi delegation, according to people with knowledge of the talks.

Pierre Andurand, who runs the $1.5bn Andurand Capital fund, one of the world’s biggest oil hedge funds, was also invited, alongside at least one trader from Russian independent oil company, Lukoil.

The meetings between Saudi Arabia and the traders came just a day before Opec’s official talks in Vienna last week, which saw the cartel reduce production by more than 1m barrels a day in an attempt to end a two-year price rout that has hit oil producers’ economies — the first such supply deal since 2008.

While Saudi Arabia routinely gives private briefings to energy analysts in the days leading up to an Opec meeting, it is rarer, but not untoward, for the kingdom to call together the traders responsible for shipping millions of barrels of oil or trading thousands of futures and options contracts.

Saudi delegates have previously done so on occasion when they were looking to get a better feel for the market, said one person who has been attending Opec meetings for more than a decade.

 

The talks highlight the deep concern within the Saudi camp right to the last minute, despite months of shuttle diplomacy between Opec members, with the world’s top oil exporter worried about further price falls if they failed to secure a cut.

Brent, the international oil benchmark, did fall 4 per cent on Tuesday as the market bet that a deal was slipping beyond Opec’s reach. Prices then rocketed more than 15 per cent between Wednesday and Friday after Opec members reached an output reduction deal.

Mr Couling and Mr Andurand attended a meeting with the Saudi delegation on Tuesday morning, before the kingdom’s oil minister Khalid al Falih arrived in Vienna, people familiar with the meeting said. A trader from Litasco, Lukoil’s trading arm, also attended, they said.

Lukoil did not respond to a request for comment. Vitol and Andurand declined to comment.

Mr Andurand declined to comment on the meetings, but said in an earlier interview that he had been betting on rising prices since January and had not changed his position.

At the meetings, the Saudi delegation expressed caution about the likely outcome of the Opec gathering, warning that a deal to reduce output to try and bolster the price was still in doubt, according to sources familiar with the conversations.

Gulf delegates had earlier given similar warnings, with many saying a deal could be imperilled by lingering tensions between Saudi Arabia, Iran and Iraq.

Saudi oil officials sought to play down the talks, with one delegate said it was “not unusual” for them to talk to participants in the oil market.

“These discussions are a part of ongoing consultations we have with analysts, producer companies and traders particularly around Opec meetings and throughout the year,” the Saudi delegate said.

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Non-Opec producers agree to cut oil output

Global agreement designed to speed end of worst oil downturn in a generation.

 

Opec has won the backing of countries outside the oil cartel to join supply cuts for the first time since 2001, overcoming the final major obstacle for a global agreement to curb output.

 

Russia, the biggest oil exporter outside the group, alongside 10 other countries such as Mexico, Oman and Azerbaijan on Saturday agreed to reduce their production by 558,000 barrels a day.

 

The agreement in Vienna is designed to speed the end of the worst oil downturn in a generation by mopping up excess supplies and boost prices, providing some relief to resource-rich nations whose economies have taken a big hit.

“Today’s agreement will accelerate the stabilisation in the markets,” said Russia’s energy minister Alexander Novak. Moscow last week committed to reduce production by 300,000 b/d from its more than 11m b/d of current output — a post Soviet era high.

Prices have rallied by 15 per cent since November 30, when Opec’s 13 members led by the group’s largest producer Saudi Arabia, agreed to curb output by more than 1m barrels a day. Khalid Al Falih, the kingdom’s energy minister, said on Saturday he hoped the deal could help create a new framework to manage a “fragile” oil market.

Saudi Arabia, which last week agreed to cut production to just over 10m b/d, could make a deeper cut than agreed last week, Mr Falih added.

The kingdom had said last week’s Opec deal — aimed at bringing the group’s production to 32.5m b/d — was contingent on participation from non-Opec countries, primarily Russia.

“Securing non-Opec’s full participation in the Opec agreement reached in Vienna is a victory for Opec and especially Saudi Arabia, which has long insisted the burden of cuts needed to be shared,” said Jason Bordoff at the Center on Global Energy Policy at Columbia University.

Moscow has said its involvement is based on Opec’s compliance with cuts.

“It is very significant to have an agreement by the two powerhouses that are Russia and Saudi Arabia. A new geopolitical dynamic is being created which could be transformative for oil markets,” said Olivier Jakob at consultancy Petromatrix.

While a committee has been set up to monitor producers’ cuts, that start from January 1 for six months, industry analysts have said historically it has been rare for either Opec producers or Russia, to fully stick to their sides of the bargain.

Even so, Abhishek Deshpande at Natixis, said: “There is limited doubt, even if there was limited compliance, that their action should help balance markets earlier in 2017 than was otherwise expected.”

“This is a very historic meeting,” Opec’s secretary-general Mohammed Barkindo said ahead of Saturday’s meeting.

Brent crude, the global benchmark, closed up 38 cents at $54.33 a barrel on Friday. This is a jump from $46 a barrel before last month’s agreement, but still less than half the level of the mid-2014 peak of $115.

The industry will be watching closely to see whether the jump in prices revives the US shale industry, which was targeted alongside other high-cost producers by Opec two years ago when it decided to remove production constraints.

Opec delegates said ahead of the meeting that they expected non-Opec commitments to tally around 600,000 b/d and they would come in the form of production cuts as well as natural declines.

Mohammed Bin Saleh Al-Sada, Qatar’s Minister of Energy and Opec president said just before the ministerial discussion got under way: “There is a growing consensus among producers that the market recovery process has taken far too long, with severe consequences.”

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