Can Oil Hold Onto OPEC Deal Gains? – Oil & Energy

OPEC did the unthinkable – it decided to cut production for the first time since the global financial crisis in 2008. The group met in Algiers and decided to cut its production from 33.24 million barrels per day (mb/d) to a range of between 32.5 and 33.0 mb/d. The details will be finalized in November, but the tentative deal succeeded in boosting oil prices more than 6 percent on Wednesday, and by another 1 percent on Thursday.

Deal still uncertain. There are plenty of reasons OPEC won’t reach a deal. The group did not allocated production limits to each of its members, so it is still unclear who will be cutting. Also, some of the members could cheat, even if they do seal the deal in Vienna in November. Moreover, if the cap is placed at the high end of the range – 33.0 mb/d – it would amount to a very unimpressive cut of just 200,000 barrels per day. On top of that, Nigeria, Iran, and Libya are exempt from the limits. They are allowed to produce at “maximum” levels, and combined they are hoping to bring back 1.5 mb/d. The psychological effect on the oil market has been enormous, with oil prices up big on the week. But with oil traders starting to question the viability and the significance of the deal, the rally came to a temporary halt on Friday.

Iraq questions numbers. Another unexpected sticking point could be Iraq, which is no longer exempt from OPEC limits after years of special treatment as it recovered from war. Iraq’s oil minister questioned the data that OPEC was using – the minister argued that Iraq was producing much more than OPEC was giving it credit for. The discrepancy would potentially limit Iraq’s production more than it should, Iraqi officials say. The conflict poses another stumbling block for the November meeting.

Saudi Arabia needed a deal. The OPEC production cut only came because Saudi officials did an about-face, a 180-degree turn from its position over the past two years of letting the market sort out the surplus. The Wall Street Journal reports that Saudi officials, including energy minister Khalid al-Falih, grew concerned about the economic toll on the kingdom from persistently low oil prices. The minister reportedly became alarmed from the latest forecast for oil prices remaining low through 2017, and the revelation was enough to lead the Saudis to reverse course. “I’m not convinced they have changed from the market-share policy but I have to think they have erased the ‘We don’t care if it goes to 20 $/bbl’ policy,” Olivier Jakob of Petromatrix told the WSJ. “They seem less idealistic, a little more realistic.”

Refiners down on OPEC deal. The surge in oil prices will be welcome by producers, but not by refiners. The BI North America Refining & Marketing index, an index of refiners, dropped by 4.6 percent on Thursday. Higher oil prices is bad news for refiners, which need to purchase crude in order to process it into refined products. Gasoline inventories are still high, and margins are low, Moody’s said, a problem that could persist for some time.

Oil analysts not impressed by OPEC cut. Oil prices skyrocketed this week after OPEC came to terms, but seasoned oil analysts are not exactly overwhelmed. Several major investment banks – including Goldman Sachs, Societe Generale, Jeffries and UBS – did not alter their oil price forecasts on the news. Citi’s Ed Morse said the decision is “still kicking the can down the road.” Goldman, however, did say that if the deal is implemented, it could add $7 to $10 per barrel to the oil price next year.

Read the full report here.