By Ahmad Ghaddar, Vladimir Soldatkin and Ernest Scheyder
VIENNA (Reuters) - OPEC edged closer on Thursday towards raising oil output, with Iran softening its opposition to an increase and Saudi Arabia warning of supply shortages and price rallies if production remained stable.
A production rise of about 1 million barrels per day (bpd) or around 1 percent of global supply was emerging as a consensus for the group and its allies, OPEC sources told Reuters, adding that Iran could agree under certain conditions.
The Organization of the Petroleum Exporting Countries meets on Friday to decide output policy amid calls from top consumers such as the United States, China and India to cool down oil prices and support the world economy by producing more crude.
Russia, which is not in OPEC, has proposed producers raise output by 1.5 million bpd. Saudi Energy Minister Khalid al-Falih said on Thursday the world needed at least an extra 1 million bpd to avoid a shortage in the second half of 2018.
OPEC and its allies have since last year been participating in a deal to cut output by 1.8 million bpd. The measure has helped rebalance the market in the past 18 months and lifted oil <LCOc1> to around $73 per barrel from as low as $27 in 2016.
But unexpected outages in Venezuela, Libya and Angola have effectively brought supply cuts to around 2.8 million bpd in recent months. Iran's output is also likely to fall in the second half of this year due to new U.S. sanctions.
Iran, OPEC's third-largest producer, has so far been the main barrier to a new deal as it said on Tuesday OPEC was unlikely to reach an agreement and should reject pressure from U.S. President Donald Trump to pump more oil.
But on Wednesday, Iranian Oil Minister Bijan Zanganeh said OPEC members that had overdelivered on cuts in recent months should comply with agreed quotas.
That would effectively mean a boost from producers such as Saudi Arabia that have voluntarily cut more deeply than planned.
"An increase is acceptable if justified from the demand side and if it is agreed by all OPEC members. An increase because of external pressure on OPEC is not acceptable," said a source familiar with Iranian thinking.
Ecuador said OPEC and its allies could agree to a compromise increase in output of around 0.5-0.6 million bpd.
Falih said the world could face a supply deficit of up to 1.8 million bpd in the second half of 2018 and that OPEC's responsibility was to address consumers' worries.
"We want to prevent the shortage and the squeeze that we saw in 2007-2008," Falih said, referring to a time when oil rallied close to $150 per barrel.
He said the exact mechanics of any increase would be decided among all OPEC members on Friday.
Three OPEC sources said ministers would debate on Thursday whether to raise supplies by 1 million bpd as the main proposal for the meetings of OPEC and its allies on Friday and Saturday.
If the proposal were approved, all OPEC members and their non-OPEC allies could raise supplies pro-rata, with Saudi Arabia adding about 0.25-0.3 million bpd.
Iran had yet to agree to the proposal, the sources said.
Iraq and Venezuela have also opposed a relaxation of production cuts, fearing a slump in prices.
On Thursday, however, Iraqi Oil Minister Jabar al-Luaibi said: "We are in comprehensive talks with all ministers, especially Saudi Arabia and Iran, and we are trying to narrow that gap between the two and we hope that this afternoon we will reach some sort of good compromise”.
(GRAPHIC: OPEC compliance in May - Reuters Survey - https://reut.rs/2JRWnw1)
Zanganeh was due to attend a ministerial committee on Thursday. Iran is usually not part of the committee, which groups Russia, Saudi Arabia, the United Arab Emirates, Oman, Kuwait, Algeria and Venezuela.
Before the committee meeting, Zanganeh was also scheduled to meet Russian Energy Minister Alexander Novak for separate talks.
Zanganeh told CNN on Wednesday that if OPEC returned to regular compliance, the real supply increase from the group would constitute around 460,000 bpd.
OPEC sources said the final compromise also depended on whether OPEC agreed to mention U.S. sanctions in the group's communique, an important point for Iran, which has blamed U.S. measures against Tehran for the recent rise in oil prices.
The United States, which rivals Russia and Saudi Arabia for the position of world No.1 oil producer, is not participating in the current supply pact.
(GRAPHIC: Balance between global oil supply and demand - https://reut.rs/2MB4tH3)
(Additional reporting by Alex Lawler, Rania El Gamal and Shadia Nasralla; Writing and editing by Dale Hudson and Dmitry Zhdannikov; Graphics by Amanda Cooper)