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Saudi Arabia walks tightrope ahead of fraught OPEC crude oil meeting

London — Saudi Arabia is faced with a tricky balancing act at the upcoming OPEC meetingin Vienna. The world's largest crude exporter is under pressure to increaseoutput but risks alienating its partners in the 14-member group.

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Oil markets will pounce on any misstep.

Cuts of 1.8 million b/d agreed by OPEC along with Russia and smaller allieswere expected to last until the end of the year. But a surge in prices lastmonth above $80/b and increasingly frayed geopolitics in the Middle East haveshifted the agenda of their twice-yearly gathering Friday next week.

Russia's oil companies are champing at the bit to pump more. Energy ministerAlexander Novak said Thursday a plan to lift quotas by 1.5 million b/d is nowon the table.

To complicate matters US President Donald Trump has lobbied for more oil,tweeting Wednesday that "oil prices are too high". His sentiments have beenechoed by Indian Prime Minister Narendra Modi.

"The Saudis do not believe there is a production problem but are ratherlooking to address a political problem caused by higher prices -- Trumptweets, Indian minister phone calls, keeping Russia in the fold on marketcoordination, concern from International Energy Agency about higher prices,etc.," said Joe McMonigle, an analyst with Hedgeye who will be in Vienna forthe meeting.

Saudi Arabia has signaled its willingness to gradually ease back on quotas tooffset potential loss of more Venezuelan barrels and the impact of impendingUS sanctions on Iran. The IEA on Wednesday said it expects Venezuelanproduction to fall some 560,000 b/d by the end of 2019 and for Iranian lossesdue to sanctions to total up to 900,000 b/d over the same timeframe.

But Riyadh faces opposition from Iran. The Islamic Republic, which supportsthe kingdom's enemies in the war in Yemen, argues the market is balanced andoil prices at current levels above $70/b can be absorbed by consumers.

In practical terms, Iran has little capacity to raise its own production andcompete in a market share battle.

But Saudi Arabia probably wants to preserve OPEC unity as it charts a courseto a more stable, higher price market beyond this year. In 2019 it hopes topublicly list its state oil company Aramco and fund further economic reforms.

Unleashing output too quickly could compromise the hard-won price gains earnedfrom 18 months of production discipline. Neither can Riyadh afford to be tooaggressive in forcing its will on poorer OPEC members if it wants to maintaincooperation on policy in the future.

Winners and losers

However, the fundamentals look to be in Saudi Arabia's favor in the shortterm.

OPEC produced 31.90 million b/d in May, according to the latest S&P GlobalPlatts OPEC survey. That's about 840,000 barrels below its ceiling of about32.74 million b/d, when every country's quota is added up. This gives the blocsome cushion to loosen the taps and still demonstrate strong compliance withthe deal.

Many analysts foresee the OPEC/non-OPEC coalition -- which controls almosthalf of global oil production -- agreeing to an output rise in theneighborhood of 500,000 to 800,000 b/d. It's the exact timing of the increasesand how they might be divided up which remains in question.

Spare capacity within OPEC is not spread evenly, so any lifting of theproduction caps would lead to winners and losers. The IEA has estimated OPECspare capacity at 3.42 million b/d, with about 60% held by Saudi Arabia.

The US Energy Information Administration, which has a tighter definition ofspare capacity, pegs OPEC's at 1.94 million, with all of it in the MiddleEast.

"Nobody still has clear visibility on the meeting," a non-Gulf delegate toldS&P Global Platts on condition of anonymity. "Many things can happen betweentoday and June 22."

Hints of any consensus -- or a further hardening of positions, as the case maybe -- could come from the OPEC Economic Commission Board's meeting Mondaymorning at 9:30 am Vienna time. The board consists of each member's nationalrepresentatives, the third ranking member of each delegation.

On Tuesday, a Joint Technical Committee of the OPEC/non-OPEC coalition meets.

The OPEC Seminar, a two-day conference with speakers from across the industry,including OPEC ministers and the CEOs of BP, Total, Eni, Saudi Aramco, ADNOCand other companies, will take place Wednesday and Thursday.

The OPEC/non-OPEC Joint Ministerial Monitoring Committee also meets Thursday.

The week culminates with the full OPEC ministerial meeting on Friday, withministers from the 10 non-OPEC participants in the production cut agreementjoining them on Saturday.

The countries "will discuss a potential redistribution of quotas as well aspossible framework principles for further regular and stable cooperationbetween OPEC and non-OPEC countries," the Russian energy ministry said in astatement.

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