OPEC considers plan to cut output

A proposal to reduce global oil production by almost 1 million barrels a day is seen as a starting point for more talks.

OPEC is considering a deal to cut crude output.

OPEC plans to discuss Wednesday a proposal that would cut almost 1 million barrels a day of global production over one year, said people involved in the discussions, setting up a showdown between Saudi Arabia and Iran.

The plan isn’t expected to be agreed to on Wednesday when the Organization of the Petroleum Exporting Countries plans an informal gathering on the sidelines of an energy conference in Algiers. The scenario is meant to start discussions that could pave the way for an agreement when the producer group meets again in November, the people said.

The proposal, if eventually adopted, would represent the 14-nation cartel’s first concrete action to prop up the market since oil prices crashed beginning in 2014. It would also represent a departure for Saudi Arabia, which has opened the spigots wide during the market slump in a fierce competition for customers with US oil producers and others.

The discussions shift the debate within OPEC back to making production cuts to reduce the global oversupply weighing on prices and comes after six months of the cartel considering a so-called output freeze — holding it steady following months of increases.

The proposal puts centre stage the differences between Saudi Arabia and Iran, two bitter rivals for power in the Middle East whose disagreements have scuttled other OPEC attempts at reaching a production deal.

Under the proposal, Saudi Arabia would carry out the bulk of the reduction, cutting 400,000 barrels a day from record highs of almost 10.6 million barrels a day in August, the people said. The kingdom is expected to reduce its production anyway as a matter of course as oil demand falls off the summer highs.

In return, Iran would have to agree to freeze at 3.7 million barrels a day — slightly above its August levels, the people said. Non-OPEC members like Russia and Oman would also be expected to be part of the cuts, the people said.

Iran’s reaction to the Saudi-backed plan isn’t yet clear, but the proposal wouldn’t allow Iran to carry out plans to increase its production to more than 4 million barrels a day.

Oil prices fell Tuesday afternoon after Iran’s oil minister Bijan Zanganeh said he hadn’t received any official proposal from Saudi Arabia. Brent traded at $US46.27 on Tuesday afternoon in London, down 3.46 per cent from a day earlier.

Mr Zanganeh said that this week’s meeting in Algiers was only for consultations and that his country had no plans to limit its oil production. Iran is trying to ramp its production back up now that Western sanctions that crippled its oil industry have ended.

The proposal comes as OPEC tries to find a consensus this week on how to react to oil prices that have stayed stubbornly low for two years.

OPEC Secretary-General Mohammad Barkindo said Wednesday’s informal gathering could be turned into an emergency formal meeting if the cartel finds consensus.

But, Saudi Arabia’s energy minister, Khalid al-Falih on Tuesday called this week’s OPEC meeting “consultative” and suggested it could take months for the oil-producing cartel to find consensus.

“The market recovery is slower than we thought. But we remain optimistic, “ said Mr Falih, who oversees Saudi oil policy and is among the most influential voices in the energy industry.

OPEC members appear deeply divided. In talks last week in Vienna, Saudi and Iranian officials couldn’t agree on basic details of a production deal. Similar efforts were scuttled in April after Saudi Arabia backed out because Iran wouldn’t participate.

“In the room where the Saudis and Iranians meet, there will always be burning-hot political tensions,” said one of the people familiar with the plan.

This time, there is more pressure to reach an agreement, and Mr Barkindo told reporters that OPEC has made progress since the breakdown of talks in April. Iran is closer to clawing back the share of the oil market it says it enjoyed before Western sanctions crippled its petroleum industry, and Saudi Arabia has been pumping oil at record highs, helping send prices lower.

The proposal to be discussed Wednesday is intended to be a dramatic action, the people said. If enacted, the people said the plan would take enough production off the market that oil buyers would begin drawing down the record-high levels of oil inventories that built up when supplies were abundant and cheap.

Without providing details about the proposal, Mr Barkindo told reporters that more than 340 million barrels of production must be taken from the market to bring stockpiles of stored crude to acceptable levels. Under the proposal, OPEC would cut about 350 million barrels from the market over one year.

Production cuts are politically unpalatable in some OPEC countries because it can lead to less oil revenue. The people familiar with the proposal said it could be framed to OPEC members as a freeze, using January 2016, for example, as the reference point instead of August, when the cartel’s production was unusually high.

Dow Jones