OPEC members finally agreed a deal to cut production at the cartel’s meeting in Vienna this week, but can the entente hold together and is it entirely what it seems?

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OPEC deal explained

 

Members of the Organization of the Petroleum Exporting Countries (OPEC) have been crippled by stubbornly low oil prices. Crude oil prices have slumped from above $100 a barrel to below $50, sinking below $30 at one stage earlier in the year as a supply glut hit.

With production hitting record levels, the cartel has been eyeing an output freeze in a bid to support the price of crude.

After talks in Doha earlier in the year failed, OPEC members agreed in principle to a deal in Algiers in September. Details were thrashed out at the semi-annual Vienna meeting and to the surprise of many oil traders, agreement was reached.

What does the OPEC freeze look like?

 

Members agreed to cut production by 1.2m b/d from October levels. Libya, Nigeria and Indonesia, which is now suspended as it could not participate in the cuts, are not part of the deal but assuming their output remains at current levels it would reduce production for all 14 members to 32.5m b/d.

Saudi Arabia is shouldering most of the burden. It is cutting output by 486,000 b/d. Iraq agreed to reduce production by 210,00 b/d.

Iran managed to achieve its goal of not cutting and will be allowed to increase output by 90,000 b/d to a cap of 3,797,000 b/d. The cuts will take effect in January.

Key points -

1. OPEC will reduce its production by around 1.2m b/d to bring its ceiling to 32.5 mb/d, effective 1st of January 2017;

2. The agreement lasts six months, but can be extended at the next meeting.

 3. A Ministerial Monitoring Committee composed of Algeria, Kuwait, Venezuela, and two participating non-OPEC countries will closely monitor the implementation of the deal.

4. Deal contingent on the understanding that non-OPEC countries, including Russia, will reduce output by 600,000 b/d.

Doubts

 

OPEC may have confounded the critics but there are still lots of doubts around the deal. Will OPEC members stick to the script – they have a pretty chequered history in keeping to these kinds of agreements. It would not surprise many if some members kept the taps flowing at full tilt.

Will Russia really cut? It has apparently committed to a cut of 300,000 b/d but we don’t know if that’s from a projected 2017 output or from 2016 levels. And where will the other half of this cut come from?

US shale output is the elephant in the room but not at the table. While non-OPEC members led by Russia might cut output, US producers are not about to lend a hand. A medium-term improvement in crude prices will only offer succour to shale producers who are cutting costs fast to become more competitive.

Oil prices – Nymex crude fails $50 test

 

Trading on oil around the meeting produced some large moves in a volatile session. But by the time of the announcement markets were set on a deal and we saw crude futures pump 9%.

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However, uncertainty around really what this deal means for the market means Nymex crude futures bounced off the $50 resistance despite a pretty concerted assault. Simply put, a 1.2m b/d cut helps to offset some of the higher output but this is a market still awash with crude and it won’t do much to counter the longer-term glut.

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