Smaller OPEC+ members cry foul on Saudi-led Gulf output surge ahead of oil cuts

Saudi Arabia and Gulf allies the UAE and Kuwait are facing pressure from OPEC+ counterparts to reverse their production surges this month and right the coronavirus-impaired oil market, with prices continuing to wilt before the alliance's much touted output cut agreement goes into effect in May.

Smaller producers within the OPEC+ alliance are unhappy with the core Gulf producers for exacerbating an already oversupplied market by pushing their crude output to what they readily trumpet as record highs, according to people familiar with the situation.

Some are calling for deeper production cuts to be implemented immediately.

"The Saudis must fix this," one delegate said, while another said: "Any more cuts have to come from the big guys. We can't afford to cut any more."

The delegates spoke on condition of anonymity because talks are ongoing.

Monday's unprecedented meltdown in oil prices, with NYMEX WTI futures hitting deep negative values as the May contract neared expiry, was the exclamation point on what many OPEC+ delegates have described as an alarming and depressing ride.

The deal reached by the 23-country alliance nine days ago to rein in 9.7 million b/d, or about 10% of global supply starting next month, was meant to backstop the market against further coronavirus drops, though many analysts had already panned the pact as insufficient to confront the scale of demand destruction.

In the physical market, S&P Global Platts' Dated Brent benchmark is down some 20% since OPEC+ began meeting on April 9 to hammer out that deal.

Some countries are urging an emergency summit or at least a delegate-level technical meeting, with mid-May proposed. The full alliance is next scheduled to meet June 10 via webinar.

"There are tons of people worried about this," another delegate said.

A spokesman for Saudi Arabia's energy ministry did not respond to a request for comment, but energy minister Prince Abdulaziz bin Salman told reporters last week that contractual agreements with customers would make unwinding state oil company Aramco's production hike right away extremely difficult.

The company said it was pumping 12.3 million b/d in April, an increase of about a third from earlier levels this year. It will have to pare that back to 8.5 million b/d to comply with its quota under the new deal.

The official Saudi Press Agency tweeted a statement from the kingdom's cabinet affirming its desire for oil market stability and commitment with key non-OPEC partner Russia to implement the agreed production cuts.

The cabinet expressed "readiness to take any extra measures in cooperation with members of OPEC+ and other producers," the statement said.

Looking to Trump

As the coalition deliberates, it will keep an eye on the US, where the Texas Railroad Commission meets later Tuesday to discuss imposing output limits on producers in the state, and oil-state lawmakers continue to lean on President Donald Trump to boost prices and stave off further bankruptcies and layoffs.

Trump played a key role in brokering the OPEC+ agreement by tightening diplomatic screws on Saudi Arabia, a key military ally, and Russia, while declining to force US producers into mandatory output cuts.

One Gulf delegate said OPEC+ was unlikely to act unless "Trump makes another call to push" for a deal.

Analysts with RBC Capital said Saudi Arabia is likely amenable to making deeper cuts on its own, but will want evidence of tighter quota compliance from habitual laggards in the previous three plus years of OPEC+ supply accords.

"There is little that OPEC+ can do to arrest the demand collapse caused by the COVID-19 global lockdown," the analysts said. "One option apparently under consideration is to announce that the cuts will take immediate effect, but there could be serious contractual impediments to such a policy course and it would not stop the cargoes that are already on the water."

In the absence of immediate deeper production cuts, market fundamentals are looking to become more bearish, with global storage capacity already reaching critical levels as crude floods in.

The coalition's only option may be to ride out the market turbulence until the coronavirus pandemic abates and demand rebounds, which some analysts believe could happen later this year.

But for several members, who were already struggling with their finances before the virus decimated their lifeblood oil industries, waiting that long feels like an unpalatable option.