(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, Sept 29 Under-promise and
then over-deliver is a well-worn tactic to boost one's fortunes,
with OPEC's somewhat woolly promise to cut crude oil output the
latest example of this strategy.
Virtually nobody thought the oil producer group had even the
remotest chance of reaching an agreement on production at its
informal meeting this week in Algeria, a view that was
constantly reinforced by OPEC's energy ministers in comments and
Yet the meeting ended with the group committing to reduce
output by as much as 740,000 barrels per day (bpd) from the end
of the year, the first agreement on cutting production the often
fractious group has managed in eight years.
This tentative deal sent the price of Brent crude
soaring as much as 6.5 percent to a high of $48.96 a barrel on
Wednesday, showing the value of surprising the market.
But the real question is whether this is the start of
sustainable gains for the oil price, and much will depend on
what OPEC actually does, and how the rest of the producers
Firstly, apart from the shock value of delivering an
agreement, all OPEC actually did was kick the can down the road
to their November meeting.
However, let's not underestimate the significance of even a
tentative agreement without flesh on its bones.
OPEC is an organisation that has been riven by regional
rivalries in its recent past, which has undermined its
effectiveness and credibility.
The obvious tension between top producer Saudi Arabia and
would-be No.2 Iran has been palpable, so the mere fact that they
can reach even what appears to be an in-principle agreement is
quite an achievement.
The real work now has to be done by November, as each OPEC
member figures out what it is prepared to do in order to reduce
the group's output from around 33.24 million bpd currently to
the newly-agreed 32.5-33 million bpd.
It would seem that the bulk of this burden will have to fall
on Saudi Arabia, not only because it is the biggest producer,
but also because the others such as Iran and Iraq are still
trying to boost their output.
Other OPEC members such as Libya and Nigeria are currently
producing well below historic levels because of internal
conflicts, while others such as Venezuela and Angola are in such
dire fiscal positions that they simply cannot countenance
pumping any less oil.
Saudi Energy Minister Khalid al-Falih already hinted at this
on Tuesday, in saying that Iran, Nigeria and Libya would be
allowed to produce "at maximum levels that make sense" as part
of any output limits.
Given that it's known that Iran wants to up its output from
the current 3.6 million bpd to around 4 million bpd, this means
to effect an overall OPEC reduction of about 740,000 bpd, more
than 1.1 million bpd would have to be cut elsewhere.
SAUDIS, NON-OPEC THE KEY
Finding OPEC members willing to reduce output at all may be
tricky, other than some token amounts from the more minor
Basically it comes down to whether the Saudis are prepared
to pull back their production by perhaps as much as 1 million
bpd, or roughly 10 percent of their current output.
Simple maths suggests that if you forego 10 percent of your
output you need at least an 11-percent increase in prices to
compensate for the lost revenue, meaning Brent would have to
rise about $60 a barrel and stay there for it to make financial
sense for the Saudis to carry the bulk of the burden of lowering
This likely means that the Saudis will be pushing for Iran
to limit its production, and will also be putting pressure on
Iraq as well, arguing that it's not feasible for the kingdom to
take all the pain alone.
The other wild card is how other producers around the world
Russia, the largest exporter outside of OPEC, may be
prepared to join output curbs if it believed it would result in
a sustainable price rise.
But oil output in the United States may well reverse its
recent declines and start rising again as producers there aren't
beholden to anything other than the profit motive.
U.S. shale oil output is expected to drop for an 11th
straight month in October, according to the Energy Information
But higher crude prices may lead to a rapid reversal in U.S.
crude output as shale producers have shown they can boost
pumping fairly rapidly.
It's also likely that any sustained price rise will lift
output in other non-OPEC producers such as Canada and Brazil.
Overall, there are good reasons to be sceptical as to
whether OPEC's first agreement since 2008 will actually be
implemented, or even work if its does. But it does show that
those writing the group's obituary will have to wait a while
(Editing by Joseph Radford)