A Second Look At The OPEC Deal: Here’s What Can Go Wrong

Defying numerous skeptics, today’s historic OPEC decision to cut production, a first since 2009, marks a clear turning point in cartel, and especially Saudi Arabian, politics: individual country quotas have been allocated to all members, a third-party production verification process has been established, and the world’s largest crude oil producer Russia has committed to freeze production. At least, that’s what the deal looks like on paper.
For those who missed today’s fireworks, which saw oil soar as much as 10%, here are the key details.
The OPEC deal features explicit country level production adjustments that target a reduction in OPEC crude production to 32.7 mb/d, down 1.2 mb/d from October (as measured from secondary sources). Libya, Nigeria and Indonesia (an oil importer) are exempt from any adjustment and apart from Iran, the remaining country production decline is 4.6% vs. October (September for Angola). Iran’s participation, while essential to this deal, still leaves questions unanswered with the agreement allowing for a 90 kb/d increase in production when compared to October OPEC secondary sources, but requiring a 180 kb/d cut from October production when measured through direct communication. While no details were provided, non-OPEC countries are expected to join this deal with a target of reducing supply by 0.6 mb/d and Russia expected to commit to a 0.3 mb/d production cut. While Russia embraced the deal, it made it clear it would be very slow in cutting production due to “technical issues”, and refused to explain from what level it would make the 0.3mb/d cut – Russia previously suggested it may cut from a projected budget output level for 2017, suggesting Russia won’t actually cut production at all.

This post was published at Zero Hedge on Nov 30, 2016.

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