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OPEC and allies set to consider nine-month oil cut extension

Highlights

Falih sees oil demand growth softening but still healthy

Barkindo says keeping cuts into 2020 gives more certainty

Cut compliance in May was 163% says delegate

Vienna — Saudi Arabia and Russia have OPEC and its allies poised to extend oil supply cuts for longer than expected into the first quarter of 2020, as the bloc seeks to shore up prices in the face of flagging demand growth ahead.

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Ministers from the two largest countries of the producer alliance have endorsed a nine-month extension of the 1.2 million b/d cut accord, which expired this weekend.

OPEC will meet Monday in Vienna to discuss its options, with any agreement requiring a unanimous vote. Russia and nine other non-OPEC partners will join the talks Tuesday.

"I think it's most likely nine months, but we have to talk to other ministers," Saudi energy minister Khalid al-Falih said on arrival in the Austrian capital early Sunday. "My preference is for nine months."

He added that he saw no need for deeper cuts, as Algeria and Iraq have suggested. Even though demand growth was softening, "it's still healthy, more than 1 million b/d" and the market will balance in six to nine months, Falih said.

Russian energy minister Alexander Novak said continuing the cuts through March would take the agreement through winter, when Russia finds it harder to raise output due to harsh weather conditions.

"In the winter period it would be difficult to exit the deal, when demand is falling and in the summer period, demand rises. Therefore, it is most likely, most beneficial, to extend the deal for nine months," Novak said Saturday, according to the Prime news agency.

Frayed relations between Saudi Arabia and Iran could yet complicate the meeting, but both countries would appear aligned on an extension, as Tehran wants to preserve its sanctions-hit market share.

Even so, Iranian officials have accused Saudi Arabia of destroying OPEC unity by politically supporting US sanctions against Iran and Venezuela, while making deals on oil policy with Russia without consulting other members.

Russian President Vladimir Putin on Saturday first floated the idea of a nine-month extension after meeting with Saudi Crown Prince Mohammed bin Salman at the G20 summit in Japan.

Saudi Arabia, meanwhile, has accused Iran of being behind a series of oil tanker attacks near the Strait of Hormuz in the past month, which Iran has denied.

Iranian oil minister Bijan Zanganeh has not commented on the prospect of an extension and is scheduled to arrive in Vienna early Monday.

Sara Vakhshouri, who heads the consultancy SVB Energy International, said the unveiling of the nine-month proposal by Putin highlights Russia's influence over OPEC.

The announcement "undermines the role of other OPEC members in the policy making and major decisions that are taken by OPEC," Vakhshouri said.

FLEXIBILITY INCLUDED

However, UAE energy minister Suhail al-Mazrouei, a close ally of Falih, said he thought it was "important that the largest two producers among OPEC and non-OPEC talk." He added that he viewed an extension as necessary, but declined to say what length it should be.

Iraqi oil minister Thamir al-Ghadhban said in a statement that the coalition was headed towards an extension of either six or nine months. Venezuela's Manuel Quevedo, who holds OPEC's rotating presidency this year, said "many possibilities" were still under consideration.

OPEC Secretary General Mohammed Barkindo told reporters Sunday after meeting Falih for breakfast that an extension into 2020 would provide more clarity for the oil market.

"The longer the horizon the more and stronger the certainty to the market," he said. "I think it will be more certain to look beyond 2019." Coalition officials have emphasized that whatever decision is taken, it will include flexibility to respond to changes in market conditions.

OPEC has left itself some room to increase production and still comply with the terms of the agreement, with Saudi Arabia overcomplying with its cut commitment and involuntary declines by Iran and Venezuela due to US sanctions.

The coalition's compliance in May stood at 163%, a delegate told S&P Global Platts.

Joe McMonigle, an analyst with Hedgeye Risk Management, said a longer cut extension would help keep a floor under prices.

"It is probably a low risk strategy since demand is typically low in Q1, and OPEC can revisit the cut extension at the usual six months' time when it meets again in December," said McMonigle, who is in Vienna to observe the proceedings.

OTHER AGENDA ITEMS

Beyond the production accord, OPEC needs to decide whether to renew Barkindo's three-year term as secretary general, which is about to expire. That decision is expected to pass smoothly.

The coalition may also seek to finalize a long-mooted charter that would formalize and make permanent OPEC's market coordination with Russia and the other non-OPEC allies.

The nine-month extension "bodes well for future cooperation, a sign that both Saudi Arabia and Russia have converged," said Mohammad Darwazah, an analyst with Medley Global Advisors, who is also in Vienna to monitor the OPEC talks.

Monday's proceedings will begin with a meeting of the nine-country Joint Ministerial Monitoring Committee, co-chaired by Falih and Novak, at 10 am local time (0800 GMT).

The OPEC ministerial is scheduled for 2 pm (1200 GMT), though this could depend on when the JMMC wraps up.

The OPEC/non-OPEC ministerial is set to begin at 10 am (0800 GMT) Tuesday.

-- Herman Wang, herman.wang@spglobal.com

-- Rosemary Griffin, rosemary.griffin@spglobal.com

-- Eklavya Gupte, eklavya.gupte@spglobal.com

-- Miriam Malek, miriam.malek@spglobal.com

-- Edited by Andy Critchlow, newsdesk@spglobal.com