Oil-producing nations appeared to inch closer to an output agreement in Vienna on Wednesday, even as geopolitical tensions and competing interests threatened to fracture an alliance of crude exporters.
Energy ministers are gathering in the Austrian capital this week to determine the future of OPEC's 18-month-old agreement with Russia and other producers to limit oil output. The strategy has shrunk a global crude glut, but with oil prices recently hitting 3½-year highs, the producers are trying to reach consensus on easing the output caps to prevent the market from overheating.
Saudi Arabia and Russia, both of which have the ability to increase production, are pushing for a substantial output hike. Meanwhile, countries without spare capacity — including Iraq, Iran and Venezuela — began the week lobbying to keep the supply limits in place.
There seems to be a consensus around finessing this situation to get more oil on the market, but also to enable Iran in particular to save face and abide the deal until the end of the year.John KilduffAgain Capital founding partner
The rift has stoked speculation that this year could see a repeat of OPEC's disastrous June 2011 gathering, which ended without an agreement. But after a day of comments from oil ministers, analysts said there was more optimism that the cartel would reach a deal before it meets officially on Friday.
Daniel Yergin, vice chairman of IHS Markit and a closely followed OPEC watcher, said he believes the prospects of reaching an agreement had improved since Tuesday.
"They appear to be on their way to a new deal that's going to put more oil on the market," he told CNBC.
On Tuesday, Iranian Oil Minister Bijan Zanganeh said he doubted OPEC could reach a deal this week. He also railed against Saudi ally President Donald Trump, saying American sanctions on OPEC members Iran and Venezuela had sent oil prices higher.
But on Wednesday evening, Zanganeh told CNBC that he was feeling "very good" about OPEC's production levels.
Zanganeh indicated earlier on Wednesday that Iran could accept a modest supply hike, noting that some producers were voluntarily pumping below quotas they agreed to at the end of 2016, Reuters reported.
"That is a 180 in tone and demeanor from yesterday. In fact, the mood tonight was entirely upbeat," said Helima Croft, global head of commodity strategy at RBC Capital Markets. "I think we've gone from disaster to a happy story."
Croft said the change in tone shows that Saudi Oil Minister Khalid al-Falih put his diplomatic skills to the test in one-on-one discussions with fellow OPEC members.
Falih did not address the summit as originally planned on Wednesday, but he was at Vienna's Hofburg Palace, where industry sources believe he held bilateral talks during the day.
OPEC sources and Oman's oil minister also suggested that OPEC would seek to address overcompliance with the deal, according to Reuters. The accord aims to keep 1.8 million barrels a day off the market, but output has fallen even further.
That could mean leaving the agreement in place, but increasing output slightly so that producers like Saudi Arabia are no longer overshooting their quotas.
"There seems to be a consensus around finessing this situation to get more oil on the market, but also to enable Iran in particular to save face and abide the deal until the end of the year," said John Kilduff, founding partner at energy hedge fund Again Capital.
Croft said that strategy could provide a way to hold all the countries together, but it comes with challenges.
The alliance members must decide how to account for falling output in countries like Venezuela, Angola and Mexico, Croft said. Those involuntary declines have played a major role in the group removing more barrels than it originally intended.
OPEC will also have to consider the impending loss of Iran's exports once U.S. sanctions begin to bite later this year, she added. That may entail meeting again in a few months to reassess the market.
While Russia suggested increasing output by 1.5 million barrels per day, Nigerian Oil Minister Emmanuel Kachikwu told CNBC he would not support a hike above 300,000 bpd.
J.P. Morgan analyst Christyan Malek expects OPEC to strike a deal that will satisfy Iran and put the cartel on track for an agreement with Russia and other producers, who are scheduled to meet on Saturday. While the group might eventually raise output by 1 million bpd, he anticipates a 500,000 bpd increase to start.