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OPEC Agrees on First Oil Output Cut Since 2008, After Saudis Back Down on Iran

But it's a modest cut from all-time production highs


OPEC has agreed to cut its oil output for the first time since 2008, following a capitulation by group's leader Saudi Arabia, which was forced to soften its stance on arch-rival Iran amid mounting pressure from low oil prices. According to Reuters sources in OPEC, the group would reduce output to 32.5 million barrels per day from current production of 33.24 million bpd, however some countries such as Iran were exempt from the cap, and if previous rumors were true, will be allowed to pump even more.

Putting the "production cap" in context, the 32.5MMbbl - assuming nobody cheats and this being OPEC is a given - means that OPEC's production is back to early 2016 levels (and early 2008 max levels), just shy of all time high levels hit in the past month:

Saudi Energy Minister Khalid al-Falih said that Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits which could be set as early as the next OPEC meeting in November. That represents a dramatic shift for Riyadh, which has said it would reduce output to ease a global glut only if every other OPEC and non-OPEC producer followed suit. Iran has argued it should be exempt from such limits as its production recovers after the lifting of EU sanctions earlier this year.

"OPEC made an exceptional decision today ... After two and a half years, OPEC reached consensus to manage the market," Iranian Oil Minister Bijan Zanganeh was quoted by Iran's SHANA news agency as saying, without giving details. OPEC's informal meeting in Algeria was still continuing after five hours.

He added that the deal means some countries should decrease production, clearly focusing on Saudi Arabia.

The biggest question, however, remains unanswered: how much each country will produce is to be decided at the next formal meeting of OPEC in November, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia, sources said.

Jeff Quigley, director of energy markets at Houston-based Stratas Advisors, said the market had yet to discover who would produce what: "I want to hear from the mouth of the Iranian oil minister that he’s not going to go back to pre-sanction levels. For the Saudis, it just goes against the conventional wisdom of what they’ve been saying.".

Today's decision goes back to Saudi Arabia's badly misjudged November 2014 gamble when it effectively cracked OPEC by unilaterally deciding to pump to the max in hopes of crushing shale competition. Having realized that it has failed to do that, it had no choice but to backtrack for one simple reason: its economy is imploding.

While both the Saudi and Iranian economies depend heavily on oil but in a post-sanctions environment, Iran is suffering less pressure from the halving in crude prices since 2014 and its economy could expand by almost 4 percent this year, according to the International Monetary Fund.

Riyadh, on the other hand, faces a second year of budget deficits after a record gap of $98 billion last year, a stagnating economy and is being forced to cut the salaries of government employees.

As such, the price of oil better surge to compensate the Saudis for the loss of volume (assuming they stick to whatever deal is ironed out in the first place), or else the tailspin its economy find itself in will result in outright default.

However, the worst outcome for the Saudis would be if US shale producers take advantage of the spike in oil prices and resume pumping at capacity. Since they are not bound by any agreement, it is virtually assured that they will, sending oil production soaring to levels that will force Saudi Arabia to quickly reneg on the agreement all over again.

* * *

We are not the only ones who are skeptical of today's "deal". This is what Bloomberg analyst Julian Lee writes in a note titled "When Is An Output Deal Not A Deal? Just Ask OPEC"

OPEC oil ministers agreed on their 1st output cut in 8 years -- or did they? Details of Algiers accord show they still have a very long way to go.

OPEC has bought itself 2 months to hammer out an  agreement among its members but cannot yet claim to have finalized a concrete deal to restrain supply.

Earlier proposed output freeze fell apart in Doha when Saudi Arabia refused to accept exemption for Iran.

Iran will not have to freeze production as part of agreement: Zanganeh.

Any agreement needs to have binding individual output limits if it is to be meaningful and those yet to be agreed.

Committee to be convened to recommend individual output limits at OPEC meeting in Nov.

Overall output ceiling could be anywhere between 32.5m and 33m b/d. Upper limit is just 237k b/d below OPEC secondary source est. of Aug. output

* * *

Previously:

As was leaked earlier today by Reuters, which reported that OPEC could announce an output-freeze deal on Wednesday in Algeria, although full details are unlikely to be firmed up before a formal meeting of the Organization of the Petroleum Exporting Countries in November, moments ago Reuters blasted that a production cut - the organization's first in 8 years - is precisely what OPEC has agreed on (citing a source so don't be surprised if everything is denied in a few minutes) at its Algiers meeting, when it announced that a deal to limit oil production has been reached, however the execution won't take place for another two months.

  • OPEC REACHES DEAL TO LIMIT OIL PRODUCTION, EXECUTION IN NOV - OPEC SOURCE
  • AFTER REACHING TARGET, OPEC WILL GO TO NON-OPEC FOR OUTPUT SUPPORT - ONE OPEC SOURCE

We also learned what the output cap would be: 32.5 mmbpd, or about 1.2mmbpd below the August production record of 33.7 million:

  • OPEC AGREES TO LIMIT OIL PRODUCTION TO 32.5 MLN BPD - TWO OPEC SOURCES

As the WSJ carefully phrased it, "OPEC Has Reached and Understanding on Output Cut"  adding that:

OPEC on Wednesday reached an understanding that a crude-oil-production cut is needed to lift petroleum prices, people familiar with the matter said, but the cartel will wait until November to finalize a plan to tackle a supply glut that has lasted longer than expected.

The consensus was reached after a 4½ hour meeting in the Algerian capital. It represents the first acknowledgment from the Organization of the Petroleum Exporting Countries that it needed to take action to alleviate an oil-price slump that has wreaked havoc on the economies of oil producers. OPEC, the 14-nation cartel that controls over a third of world oil output, has been producing at record levels as its members compete among themselves for buyers.

In other words, nothing will actually happen for at least two more months, and in the menatime, everyone will be pumping as much as they can.

Some more details: the WSJ cites a person familiar with the matter who said the cartel was considering cutting production to between 32.5 million barrels a day and 33 million barrels a day—down from August levels of 33.2 million barrels a day.

And then this:

  • OPEC TO SET UP COMMITTEE TO DECIDE LEVEL OF CUT FOR EACH MEMBER.

The one issue is that while OPEC has agreed to cut as an organization, none of OPEC's members have actually agreed to individual cuts.

Oil, as expected on this latest attempt to spark a headline driven buying frenzy, has surged on the news, and was up 4% at last check, some $1.75 higher, trading at $46.40 even though it remains unclear just how - if at all - a "supply freeze" takes place when practically all members who are not producing at capacity such as Iran and Nigeria will be granted an exemption.

The Energy sector is likewise surging.

Incidentally, the "deal" which is really an agreement to meet again in November as nothing will be "executed" until then, comes at a time when Russia, the world’s largest energy exporter, just reported it is on course to pump a post-Soviet record amount of oil in September, adding as much as 400,000 barrels a day to the country’s production. The output surge comes as OPEC nations meet in Algeria, with discussions to curb a global surplus at the top of their agenda.

Russian crude and condensate production is set to average 11.1 million barrels a day this month, compared with 10.7 million barrels a day in August, according to preliminary Energy Ministry data compiled by Bloomberg. That would surpass the 10.9 million barrels a day January production level, which officials considered as a potential cap during failed talks among producer nations in April.

This means that as OPEC is padding itself on the back for pushing the price of oil higher, what is really happening is that both OPEC and non-OPEC producers are on pace to "freeze" production at all time high levels, and meanwhile shale production is also set to ramp up now that the price of oil may once again trend higher.

As to Russian production, it has every opportunity to continue growing, potentially adding another 2-3 percent over the next 12 months if the government doesn’t raise taxes on the industry, according to Artem Konchin, an oil analyst at Otkritie Capital in Moscow. Rosneft and Lukoil, the nation’s two largest producers, have shifted their guidance on output to positive territory as they start new fields and increase spending on core production in Siberia, he said in an e-mail.

“If the freeze happens at current levels, then the bar is obviously higher,” Konchin said. “Technically, I’m not sure how that whole thing will be implemented -- no one is sure.”

The details don't matter: for now the algos are buying because other algos are buying.



Source: Zero Hedge
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