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Coming soon, 'Opec's worst meeting ever, part 2'

Saudi Arabia wants to boost oil supply but this move goes against the immediate interests of Iran and Venezuela

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Mr Al-Falih must now convince fellow Opec ministers at their next meeting, on June 22, that they need to raise production.

Riyadh

YOU know how, a few years after a Hollywood blockbuster gets released, it seems to get a remake? Well, it looks Saudi-Arabia's oil minister Khalid Al-Falih is setting himself up to reboot his predecessor's 2011 hit - "Opec's worst meeting".

His starting point is an about-face. Mr Al-Falih had said as recently as April that the group's output cuts should be extended and the goalposts moved. But in what looks like a response to US President Donald Trump's April 20 tweet attacking the group, Saudi Arabia has gone from advocating higher prices to trying to stop the rally at US$80 a barrel.

Mr Al-Falih must now convince fellow Opec ministers at their next meeting, on June 22, that they need to raise production.

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The parallels with seven years ago are clear. Then, Opec had an output ceiling that had been unchanged for two and a half years and the kingdom saw clear signs that the market was overheating and required more oil from the producer group. Members such as Iran and Venezuela, who couldn't boost their own production either as a result of capacity constraints or sanctions, rejected the Saudi proposal to raise output.

Since Opec acts by consensus, this doomed the meeting to failure. The group could not even agree on the text of a closing press release and the Saudi oil minister called it "one of the worst meetings" he had attended in almost 16 years in the job.

Roll forward to the present day and we have a very similar dynamic. Saudi Arabia wants to boost supply - although it is not yet clear by how much. Iran, facing renewed sanctions on its oil exports, is looking at a drop in output that could be at least as big as the one million to 1.2 million barrels a day it suffered shortly after the 2011 meeting. Venezuela, too, has nothing to gain by agreeing to raise production. Its oil industry is collapsing under economic and political strains. Output has already dropped by 520,000 barrels a day from the October 2016 baseline for cuts, against a promised reduction of just 95,000. It's set to fall further.

So not only will Saudi Arabia be asking Iran and Venezuela to go against their own immediate economic interests by backing a policy change that will lower oil prices, it will be asking them to do so at the behest of President Trump. That's the same President Trump who the leaders of both countries see as trying to topple them.

Mr Al-Falih met counterparts from other Gulf Arab nations in Kuwait on Saturday in an attempt to bring them onside with the new plan. As they are among the few countries in the production-cutting group with the capacity to raise output, that is the easy part of the deal. Selling it to the rest will be much more difficult.

The drop in Venezuelan supply has taken the Opec output cuts well beyond their agreed level and undoubtedly helped to accelerate the depletion of excess inventories. Easing the restrictions now may well amount to no more than bringing the cuts back into line with what the group agreed in 2016. But that alone would add more than 800,000 barrels a day to supply.

A pullback might be what it takes to keep Russia working with Opec, placating a Russian oil sector that wants to raise production. But it risks undermining Opec's statute. There are plenty of members in addition to Venezuela and Iran who are unable to raise output, and who could argue that easing production restrictions fails to safeguard their interests.

In 2011, a group of countries blocked a Saudi attempt to raise the group's output ceiling. The kingdom continued to pump more anyway, boosting its output by 1.6 million barrels a day over the first eight months of 2011. At their next gathering individual output targets were abandoned. Don't be surprised to see Saudi Arabia and Russia following their own path if they fail to carry the rest of the Opec group with them.

The next Opec meeting is preceded by the two-day Opec Seminar, a showcase event for the group which likes to use it to demonstrate its unity. This time around speculation in Vienna will be whether Opec is about to be superceded by SaRuPEC - the Saudi-Russia Petroleum Exporting Combine. Now that would be a real twist to the remake.  BLOOMBERG