LDN - Business

OPEC starts working on oil supply cut exit strategy: sources

[December 21, 2017] By Alex Lawler and Rania El Gamal

LONDON/DUBAI (Reuters) - OPEC has started working on plans for an exit strategy from its deal to cut supplies with non-member producers, two OPEC sources said, a sign that an eventual winding down of the deal is coming onto producers' radar, at least in theory.

The Organization of the Petroleum Exporting Countries, Russia and other non-OPEC producers on Nov. 30 extended an oil output-cutting deal until the end of 2018 to finish clearing a glut. But the market is increasingly interested in how producers will exit the deal once the excess is cleared.

Two OPEC sources said the group's secretariat in Vienna has been tasked to work on a plan with different options and it was too early now to say what the plan would look like.

"It's a continuity strategy, rather than exit," one of the OPEC sources said.

Oil prices have rallied this year and are trading near $64 a barrel, close to the highest since 2015, supported by the OPEC-led effort. This is above the $60 floor that sources say OPEC would like to see in 2018.

Publicly, OPEC ministers say it is too early to talk of an exit strategy. But OPEC has said producers want to continue working together beyond the end of 2018, including on supply management.

While oil prices have risen to levels seen as favorable by OPEC, the stated goal of the supply cut is to reduce inventories in developed economies, which built up after a supply glut emerged in 2014, to the level of the five-year average.

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A man fixes a sign with OPEC's logo next to its headquarter's entrance before a meeting of OPEC oil ministers in Vienna, Austria, November 29, 2017. REUTERS/Heinz-Peter Bader

OPEC is making progress and said in October OECD inventories stood 137 million barrels above the five-year average. Since the start of deal in January, the overhang relative to that average is down by 200 million barrels, Kuwait's oil minister said on Wednesday. [OPEC/M]

A discussion on exiting the deal may be needed before December 2018 if, as OPEC expects, the world oil market returns to balance by late 2018.

OPEC and its allies hold their next full ministerial meeting in June, which will be a opportunity to review progress.

Non-OPEC Russia, which has been the biggest contributor to cuts from outside the group, has been suggesting a review of the deal as early as June. However, its biggest producer Rosneft said this week the cuts could last into 2019.

(Reporting by Alex Lawler, editing by David Evans)

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