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Now for the hard part

28 Sep 2016 By Andy Critchlow

OPEC may have taken two steps forward but one step back. The oil cartel surprisingly reached a deal in Algiers on Wednesday to limit production. Crude prices jumped almost 6 percent after hours of deliberations in the North African port city produced the cartel’s first cut to output since 2008. But the respite for the battered oil market may be temporary.

The Organization of the Petroleum Exporting Countries’ 14 members still have to decide how to divide these cuts among themselves – in effect, how to share the pain. It’s a crucial detail which, if mishandled, could make a lasting price recovery elusive. And it’s one that has thwarted agreements to cap output before.

At least OPEC has given itself some breathing room. It next meets at the end of November and by then a group being set up within the cartel – which pumps about a third of the world’s crude – will be expected to have a plan for the allocation of about 700,000 barrels a day of cuts to reduce the members’ total output to 32.5 million bpd.

For that to happen, arch-rivals Saudi Arabia and Iran will have to bury the hatchet. Despite increasing output by 19 percent since trade sanctions were lifted in January, Iran still isn’t back to the pre-embargo levels it has so far insisted upon. Saudi, on the other hand, has held its oil spigots wide open at near record levels to wrest back market share lost to Russia and North American shale producers. Both may need to compromise.

Even if it’s all smiles in two months’ time, the danger is that renewed discipline within OPEC will only embolden global rivals while higher prices dampen fragile demand growth. The cartel expects global consumption to expand by about 1.2 million bpd in 2017, roughly the same modest pace as this year. And non-OPEC supply from areas like the United States has been more resilient than many analysts expected.

Of course, by the end of November the identity of the next U.S. president will also be known, and that may play into OPEC’s thinking on the chances for cooperation beyond its own membership. The group has managed to reach a long overdue deal, but it remains a long way from deliverance.


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