OPEC's meetings appear to be in disarray even before they begin this week, but analysts see a growing chance the fractured group may ultimately agree to deeper production cuts.
Members of the Organization of the Petroleum Exporting Countries meet Thursday in Vienna, and they will be joined by Russia and other non OPEC producers Friday. That larger group, known as OPEC plus, had been expected to extend an existing agreement to cut 1.2 million barrels a day through June. The agreement had been set to expire in March.
Helima Croft, RBC head of global commodities strategy, said it is now her understanding that a larger cut had the support of the OPEC core operating group, as well as its partner Russia.
Croft, speaking from Vienna, said it appears the defacto operating group of OPEC has agreed to larger cuts, but it was not discussed at a meeting on Tuesday of the Joint Technical Committee that monitors the production deal.
Iraq oil minister Thamer Ghadhban Wednesday told CNBC's Dan Murphy in Vienna that the current cuts are not enough, and the group should cut 400,000 more.
Croft said the Iraqi minister's comments created a stir and helped send oil prices about 4% higher Wednesday.
"If the plan was for a surprise party, it has been been dashed," she said. "The problem with the Iraqi oil minister putting this information out there is now it has set market expectations. Now if they come out with just an extended cut, and not deeper, and just honor the rolling agreement to go to March, that's a bearish outcome. He really did upend everything."
On Tuesday, J.P. Morgan analysts in London said in a note that their base case was now for 300,000 barrels a day cut, on top of the current 1.2 million barrels per day. They said OPEC was focused on U.S. shale's growth, and was no longer willing to give it a "free ride." As OPEC plus reined in production, U.S. production has gone full throttle, and the U.S. is now producing 12.9 million barrels a day, more than Saudi Arabia and Russia.
Ghadhban mentioned U.S. production in his comments to CNBC. "The 1.6 (million bpd) ... I think it would be more effective, no doubt about that," the minister said. "It would improve the situation within the oil supply and demand. And it is not only OPEC now who is the main player — OPEC contributes oil about 30%, and the number one producer is the U.S. So there are new realities in the world."
Iraq, OPEC's second-largest producer, happens to be one of the countries that has not been keeping to its quota, along with Nigeria. Russia has also exceeded its limits. Ghadhban's position as oil minister is also tenuous given Iraq's prime minister resigned last week and a new government will be formed.
Rebecca Babin, a senior energy trader at CIBC Private Wealth Management described the OPEC plus meeting like a dysfunctional family. with members all driven by their own opinions and objectives.
She said it's understandable that OPEC is now willing to look at further cuts. "I think it's understandable given the unrest you have in Iraq. Look what's happening in Iraq. Hardly anybody's talking about the fact Iraq has some major protests going on," Babin said. Some producers are under pressure to meet their budgets.
"They all have a heightened sense of urgency around what's happening at this meeting. They are even more dysfunctional," she said.
Babin said the OPEC plus meeting was considered to be a "stay the course" event up until last week when Russia Energy Minister Alexander Novak said he thought the group should hold off until March to make a decision.
Ahead of the meetings, OPEC's biggest producer, Saudi Arabia, was reportedly both backing further cuts and threatening to raise its own production if other members of OPEC continue to fail to meet their commitments to cut production.
J.P. Morgan analysts said Saudi Arabia, as part of a production cut, may agree to limit its output to 10 million barrels a day, from 10.3 million barrels.
John Kilduff of Again Capital said it's possible that the group could agree to cuts, and if it doesn't oil prices will get hit hard. "It will the mother of all disappointments," he said.
He said Saudi Arabia would be happy to see a bigger cut and higher oil prices, considering that Saudi Aramco's initial stock offering will be priced Thursday.
"The broader issue is they are unhappy with the lack of compliance," he said.
Analysts said they were waiting to see what Russia's position is when Novak arrives in Vienna on Thursday. Russia had opposed deeper cuts, but has been angling to have its condensates removed from the original agreement and focus instead only on its crude output. That in essence would reduce the size of Russia's production cut if agreed to.
Novak has made it clear Russia's oil producers are unhappy with the agreement, as it currently stands.
Croft said Russia may get its wish on the condensates. "It may be the price of entry," she said. Russia could get its wish on condensates in exchange for its support of further cuts.
Babin agreed and said other producers would be looking for similar treatment but they would have no leverage. Russia has said it could meet its production cut objective of 225,000 to 230,000 barrels if it was not required to count condensates, equal to about 6% of its production.
"If the call goes to Putin I think Russia will follow that the core OPEC members want," Croft said.
Analysts have said Russian President Vladimir Putin values his relationship with Saudi Arabia, and the two have agreed to energy partnerships and other ventures.