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OPEC cut: Historic decision or face-saving move

Latest Update: September 30, 2016 | 214 Views

LONDON: OPEC s deal to cut oil output in a bid to push up prices raises questions and uncertainty about whether it will last.

OPEC announced its first reduction in eight years after kingpin Saudi Arabia allowed bitter rival Iran to be exempted. At a meeting in Algiers, the cartel said it planned to cut production to 32.5-33 million barrels per day from the 33.47 mbd in August.

“The two countries have set their differences aside because of the pressure that low prices are having on the finances of many members of the cartel,” said John Plassard, research director at Mirabaud Securities.

Saudi Arabia did not previously want to cede market share to its geopolitical foe Iran.

But Morgan Stanley said lower output would have happened anyway.

“Some of the proposed declines in OPEC supply would happen naturally. Saudi Arabia reduces production seasonally every year, and the proposed cut for the kingdom is only slightly larger than the seasonal decline from 2015,” the bank s analysts wrote.

Oil prices rose sharply on Wednesday but levelled off on Thursday as investors awaited more detail about the agreement.

It will not come into force immediately and the markets are now looking at the OPEC meeting in Vienna in November to see what action is taken.

“There is also the not insignificant matter of persuading non- OPEC members like Russia, who are not party to the deal, to come on board. Good luck with that one!” said Michael Hewson, chief market analyst at CMC Markets UK.

Even within OPEC, tensions on production levels for each of the 14 members could come to the fore.

“Following today s meeting, the Iraqi oil minister rejected OPEC s secondary sources oil output estimate, which is the first sign that cracks are already appearing in deciding which producer cuts and by how much,” Barclays said in a note to investors.

Given the uncertainty surrounding the agreement, analysts are reluctant to pronounce judgment on what effect — if any — it could have on the world economy.

Even if it is enacted and global production stabilises, it will still be very high.

“The announced production cap of 32.5 million barrels per day is only 1.2 million barrels less than the historic production level of August 2016,” Plassard said.

Jeremy Cook, chief economist at Worldfirst, said higher prices could be a problem for consumers.

“Cuts in oil prices since 2014 represented a rebate to the man in the street, but we believe that consumers have largely spent that money and may have difficulty if prices run drastically higher,” he said.

Cook also said that a price increase could lead to higher inflation but warned this would be no victory for central banks trying to avoid deflation.

“It is not time to start talking about central banks hitting their inflation targets — they want wages to drive inflation, not commodities,” he said.



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