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Why OPEC Could Strike Deal for Real on Production this Time and End Failed Strategy


11/20/2016


Why OPEC Could Strike Deal for Real on Production this Time and End Failed Strategy
When OPEC meets at the end of the month to curb production and stabilize the oil market, it is expected to deal for real this time, striking some form of agreement.
 
What could amount to an agreement to freeze production increases and actually cut back some output, has been hashed out by the cartel and non-OPEC members. With the bottom line being that Saudi Arabia, the world's largest oil exporter, was not willing to cut or freeze output unless all producers would do the same, the oil producers have tried and failed to strike a deal in the past.
 
"I think the odds are strongly in favor of the deal because Saudi wants the deal. If they want a deal, there will be a deal. Saudi Arabia drives the bus," said Helima Croft, RBC's global head of commodities strategy.
 
The decision to work on an agreement to cut production to between 32.5 and 33 million barrels a day was taken by the Organization of the Petroleum Exporting Countries at a September meeting in Algiers. Now analysts say there could be a mix of production freezes and cuts that make up the final deal as the OPEC had left the details of how the cuts would be shared for the Nov. 30 meeting of OPEC oil ministers.
 
"All of the OPEC producers, including non-OPEC Russia, have really pushed hard over the last three to four months to extract the last thimble full of oil that they possibly can in order to set themselves up in the best position to agree to a production freeze. Russia is at a maximum," said Chris Weafer, senior partner with Macro-Advisory.

After following a policy for the past two years of letting market forces drive prices, OPEC's producers are more serious than in previous attempts, and they are all keen to increase revenues, Croft said. Producers sent the price of oil cratering, to a low of about $26 in February as they ramped up production to record highs.
 
Production was driven up by 240,000 barrels a day to more than 33.6 million barrels a day in October ever since agreeing to the framework of a deal as OPEC kept pumping. The biggest contributors to the increase were Iraq, Libya and Nigeria.
 
Because of Saudi Arabia's efforts to makeover its economy and plan to float stock in its state-owned oil company next year, its energy minister has said it's in the kingdom's interest to have oil trade above $50 per barrel as the country has been promoting the deal, Croft noted. A deal spring was filed due to Saudi Arabia's differences with Iran. "It's striking to me that Khalid Al-Falih twice in the last week came and talked about the importance of getting this done," said Croft.
 
Eve as an agreement looks promising now, oil prices have been rising and falling on the prospects of the deal. However, it is questionable how much impact an agreement would actually have on prices.
 
"These guys are working the newswires like crazy. The Russian minister is on the wires every day talking up the prospects for a deal. I think the market is going to see right through this deal. It's not going to be good for them. They'll be scrambling again," said John Kilduff of Again Capital.
 
(Source:www.cnbc.com) 


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