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Russia keeps market guessing ahead of Vienna OPEC meeting

Despite its best efforts, Saudi Arabia has yet to convince Russia tocommit - at least not publicly - to extending the OPEC /non-OPEC productioncut agreement through the end of 2018, injecting some uncertainty ahead ofThursday's closely watched meeting in Vienna.

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Traders have priced in the nine-month extension favored by the Saudis asa fait accompli, betting that its energy minister Khalid al-Falih's oildiplomacy efforts will win the day.

But the mixed signals from Russia, whose energy minister Alexander Novakhas said he would prefer to wait until closer to the deal's March expiry toannounce any decisions, has many analysts warning of oil market volatility inthe week ahead, as headlines and rumors of handshake agreements and horsetrading come hot and heavy.

"Russian dithering on the timing of a decision of an extension or itsduration is exactly what can make the oil market nervous," analysts withinvestment bank UBS said in a note Friday. "Should the outcome of the nextOPEC meeting fall short of expectations, the large net?long speculativeposition on oil futures can unwind, sending prices lower and volatilityhigher."

The cut agreement calls on OPEC and 10 non-OPEC partners, led by Russia,to cut a combined 1.8 million b/d through March in a bid to draw downinventories of oil in storage and hasten the market's rebalancing.

While the market has tightened considerably in the past few months, OPECkingpin Saudi Arabia is seeking to continue the cuts through the end of 2018to keep prices stable as it embarks on significant economic reforms and thepossible listing of its state-owned oil company Aramco.

But any such deal would need to have the backing of Russia, the world'slargest producer with some 12% of global output, to have any bite, givenOPEC's diminished market share.

Novak has said he supports continuing the cuts, but has repeatedlydeclined to say for how long exactly. Many Russian oil companies have madeknown their discomfit with the deal to begin with, and Russia is also wary ofsending oil prices too high, which would strengthen the ruble and hit itsexport economy.

"Nearly everybody speaks today about the necessity to extend the deal,"Novak said in an interview Friday from Bolivia with Russia's RBC TV network,which was posted on the Russian energy ministry?s website. "In principle,Russia also supports those proposals. Different options are being considered."

Yasser Elguindi, an analyst with consultancy Energy Aspects, said therecent rise in prices, driven by robust demand and tighter supplies from theOPEC/non-OPEC cuts, has given some members of the 24-country coalition pauseto consider how aggressive they should be, particularly if 2018 demand shapesup to be similarly strong.

Higher prices would also unleash more US shale production, as companieshedge output, a major concern of many OPEC members.

ICE Brent futures, which were trading at $63.56/b late Friday, are upsome 42% from the 2017 low of $44.82/b in June.

"The goal is not to overtighten the market," Elguindi said. "They'reworried about the upside more than the downside. They're trying to givethemselves maximum flexibility and optionality. That's the only reason forthis debate. It's not that they want to abandon the agreement and produce asmuch as they want."

If no consensus forms around the nine-month extension, the coalitioncould opt for a shorter one of, perhaps, three months, which would take theagreement through the next OPEC meeting, slated for late June.

Another possibility, according to OPEC watchers, is that the level of thecuts could be tied to market conditions, with perhaps the five-country JointMinisterial Monitoring Committee - composed of Kuwait, Russia, Venezuela,Algeria and Oman - making recommendations as it meets every two months to thefull 24-country coalition.

"I think the risk that they might not meet market expectations is likelyto try to make them employ some kind of face-saving measure," said MichaelCohen, an analyst with investment bank Barclays . "Who knows whether themarket will embrace that with not much of a price change."

VIENNA SCHEDULE

Ministers will begin arriving in Vienna early in the week, with bilateraland multilateral meetings - some scheduled, some ad hoc - to be held invarious hotels downtown.

On Wednesday, the JMMC, chaired by Kuwait, will meet at the OPECsecretariat, where it will assess compliance with the deal, review marketconditions, and possibly draft recommendations on the future of the cutagreement for the full coalition to consider.

On Thursday, OPEC ministers will gather for their formal biannualmeeting, with the opening session scheduled to begin at 10 am local time,according to an agenda posted on the organization's website.

The non-OPEC ministers will then join their OPEC counterparts at 3 pmlocal time for their meeting. Up to 20 additional countries beyond the current24-country coalition have been invited to the meeting, a source told S&PGlobal Platts on Thursday.

These include Chad, Ghana, Cameroon, Congo-Brazzaville, Niger,Mauritania, Cote d'Ivoire, Turkmenistan and Uzbekistan.

A press conference to announce any decision and a formal communique isscheduled for 5 pm local time, though that can - and often is - delayed if thetalks require more time.

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

-- Edited by Maurice Geller, maurice.geller@spglobal.com