Former Algerian energy minister, Chakib Khelil who led OPEC the last time it decided to cut supply, has said the organisation needed to do something fast about agreeing on a freeze deal to boost price.
Khelil is optimistic the group will agree on freeze deal this week as low oil prices will force members to act.
With most of the Organization of Petroleum Exporting Countries now producing near full capacity, it should be straightforward to promise no further increases, said Khelil, who was the group’s president in 2008 when it agreed a record output cut that reversed a collapse in crude prices.
“I am optimistic about an oil freeze,” he said in a phone interview with Bloomberg.
“They’re already feeling pain. Why add to the pain when they can avoid it just by saying something? Most producers have already reached their maximum level and their largest share of the market. There’s not much cost.”
Brent futures traded near $47 a barrel on Monday, less than half the price two years ago. Crude rallied last month on speculation OPEC and Russia might announce a pact in the Algerian capital, but has since retreated on doubts there will be any serious steps to reduce the world oil surplus.
“They need to do something if they don’t the market will react negatively,” Khelil said.
OPEC’s last attempt to strike a production deal with Russia collapsed in Doha in mid-April when Saudi Arabia insisted at the last minute that Iran had to join in. While Iran refused then because it was starting to restore exports after the end of sanctions, it’s now producing near full capacity and should have fewer objections to a cap, Khelil said.
The organization is unlikely to reduce supply though, as its overall strategy to eliminate the global oil surplus by pressuring its rivals will eventually succeed, Khelil said.
“They won’t go for a cut,” he said. “They’re going to continue with the strategy to defend their share of the market, which will be re-balanced next year.”
Meanwhile, Saudi Arabia has offered to reduce oil production if rival Iran agrees to cap its own output this year.
The agreement comes as a major compromise ahead of talks in Algeria this week, three sources familiar with the discussions told Reuters.
The offer, which has yet to be accepted or rejected by Tehran, was made this month.
Riyadh is ready to cut output to levels seen early this year in exchange for Iran freezing production at the current level, which is 3.6 million barrels per day, the sources said.
“They (the Saudis) are ready for a cut but Iran has to agree to freeze,” one source said.
Two more sources confirmed the offer was presented to Tehran.
The first source did not say by how much Riyadh would cut if Iran agreed to freeze at 3.6 million bpd, which has been the OPEC nation’s output for the past three months.
Riyadh’s production has spiked since June due to summer demand, reaching a record high in July of 10.67 million bpd and edging down to 10.63 million bpd in August.
From January to May, Saudi Arabia produced around 10.2 million bpd.
Two sources said Saudi Arabia’s Gulf OPEC allies the United Arab Emirates, Qatar and Kuwait were expected to contribute to any reduction if an agreement were reached.
Saudi Arabia, by far the largest producer in the Organization of the Petroleum Exporting Countries, will shoulder the biggest cut, the sources said.
The proposal can be seen as a shift by Riyadh, which orchestrated the current OPEC policy in 2014 by refusing to cut output alone to support prices and chose to defend market share against rivals, particularly high-cost producers.
A fall in oil prices to $30-$50 per barrel from levels as high as $115 seen in June 2014 led to a boost in global oil demand and a decline in high-cost supplies such as those from the United States.
But the Saudi strategy caused a rift in OPEC, whose poorer members have faced a budget crisis and unrest. Riyadh and its Gulf allies also had to tighten their belts after a decade of generous public spending.
As the pain of cheap oil grew and pressures on Saudi finances increased, Riyadh and Tehran signaled they were willing to show more flexibility to prop up prices.
However, the first attempt at a global production pact collapsed in April when Riyadh insisted Tehran participate. Iran has said it will not join any such agreement until it regains market share and boosts output to pre-sanctions levels of around 4 million bpd.
OPEC members are meeting on the sidelines of the International Energy Forum, which groups producers and consumers, in Algeria from Sept. 26-28. Non-OPEC producer Russia is also attending the forum.