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The Output Deal Surge. Hourly Chart
Oil made headlines last week when OPEC reached an agreement on an output cap during the informal talks in Algiers. The meeting labelled as consultative - one with no decisions on the table, was expected to serve as proof of the dysfunctional set up of the group, presenting it more and more irrelevant. Little did anyone know that for the first time in eight years the interests of OPEC participants would align to some extent, let alone a deal on trimming the output to 32.5 mb/d would actually satiate all of the parties.
Several developments led up to the agreement, shifting tables from one side to another and tinting the environment fertile for discussion on changes in output levels.
Libya took a small step towards its output target of 1 mb/d and raised its production by 70% to 450,000 b/d over the week of the meeting, putting some of the abandoned oil fields back into activity. The additional 200,000 b/d flawed price forecasts for oil, expanding the outstanding 1.6 mb/d surplus to spawn even more scepticism on the timeframe in which the market could regain balance.
A clash between both internal and external political and economic pressures and a tireless chase after profits stemming from the captured market share between the OPEC economies put the deal seemingly out of reach. The two major forces standing in the way of an agreement were Iran and Saudi Arabia, and it was them who played a critical part at the table last week as well. Financial pressures weighing on the economic stability of Saudi Arabia echoed in the desperation with which the giant addressed the output freeze negotiation, agreeing to exclude Iran, its biggest rival, from the production cut. Not to mention that Iran easily complied with such a proposition, going on to announce their plan of a 4 mb/d output boost when EU sanctions are lifted.
But Iran is not the only one of the exempt countries that could cast shadow on OPEC's efforts to boost the oil prices. With Libya and Russia accelerating their output already, Nigeria has potential to add to the trend. Iraq, subject to various quotas over time, however, was not lucky enough to join the freeze exceptions, leading us to the next point which, amongst several others, demonstrates just how fragile the agreement really is.
With clashes between Iran and Saudi Arabia finally out of the way, Iraq's oil minister Jabar Ali al-Luaibi ultimately presented his previously concealed stance, stating that the deal is not a fit for Iraq, due to underestimation of its production. Luaibi called out the allegedly phony data source, stating that a correction in estimates no later than November would be the only scenario which would lead Iraq to remain a part of the deal.
To add to the overall criticism of the deal's feasibility, analysts not only remain sceptical on whether OPEC will actually act on its word, but question its efficacy in the very core. A 32.5 mb/d cap on the current 33.24 mb/d aggregate output eliminates 740 000 b/d, which is, firstly, too little to significantly lift the price in general, and secondly, is most likely to be swallowed up by the expansionary prospects of the exempt OPEC members. Furthermore, Saudi Arabian oil output was bound to be cut anyway, as seasonal needs for expanded production fade away, suggesting that the official assent to the output cut could just be plain marketing.
While the immense rally of oil prices upon the announcement of an agreement served well for the oil sector, gains are likely to be erased as easily if the deal falls through.