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Analysts Say OPEC Shows 'Cracks' And Agreement Looks Strained, As Oil Producers Meet

Analysts Say OPEC Shows 'Cracks' And Agreement Looks Strained, As Oil Producers Meet
Analysts say that just how tough their goal of stabilizing the world oil market has been would be showed when oil producers meet Monday as their alliance will look frayed.
Set up to oversee compliance of the deal struck by OPEC, Russia and others as an effort to boost world oil prices, there is much focus on the meeting of the five-member Joint Ministerial Monitoring Committee.
While efforts will be made to bring Nigeria and Libya into the framework because of the recent unexpected return of their production, the committee will likely recommend maintaining the policy of holding back output at current levels, analysts say.
"Clearly, OPEC has a lot of cracks," said Francisco Blanch, head of commodities and derivatives strategy at Bank of America Merrill Lynch. "The cartel is certainly under a fair amount of pressure from members that feel they shouldn’t be cutting production here. I think the meeting is going to be more routine than anything else. There will be some recommendations."
OPEC producers are being hurt as oil prices have fallen again and now languish under $50. "Ecuador wants to pull out, and then Iraq has been talking about increasing output by a half million barrels," Blanch said. Ecuador said it is raising production and has left the agreement.
Blanch said that while other ministers, from Saudi Arabia and elsewhere, could participate as observers, the monitoring committee meeting in St. Petersburg, Russia, includes Algeria, Kuwait, Russia, Venezuela and Oman.
"There's been talk of a Saudi cut being thrown around. … I don't think it's very likely right now," Blanch said. Saudi Arabia was already shouldering the biggest portion of OPEC's cut, as its largest producer, but it has also previously said it would make room for Libyan and Nigerian output if necessary.
At a time of year when it normally keeps more crude at home for domestic use, there's been speculation that Saudi Arabia could keep as much as 1 million barrels a day from the world market in August, John Kilduff of Again Capital said. "I think we're set up for a 'buy the rumor, sell the news' type of market," said John Kilduff of Again Capital.
"The only surprise to the market would be if the Saudis stood up and cut more," said Kilduff. "But there doesn't appear to be much appetite for further cuts."
An initial jump in oil prices resulting from the accord spurred more production from U.S. shale drillers and others after OPEC and other producers, such as Russia, have agreed to hold back 1.8 million barrels a day. The U.S. industry is expected to produce an average 9.3 million barrels a day this year, and 9.9 million barrels a day next year as it has become increasingly more efficient, as it exploits new technologies.
There's still a lot of oil, and even though supply has been drawing down in the U.S. and elsewhere, world oil supplies have remained stubbornly high. As crude prices fell and stayed stubbornly low many analysts have brought down their price targets. Oil prices are expected to remain between $45 and $50 per barrel this year by Blanch.

Christopher J. Mitchell

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