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Smoke And Mirrors: What Did OPEC Really Agree On?

Bijan Zanganeh

Oil prices shot up more than 6 percent this week on the news that OPEC reached a deal to cut oil production, but by Friday the rally seemed to be already running out of steam as the markets grew skeptical of the group’s ability to implement the deal.

Previously, I noted how there were reasons to question how serious the production cut actually might be. This was due to the difficulty in actually agreeing on the details of the reduction, rising oil production within OPEC that could offset the cut, and the small size of the planned cut itself (200,000 to 700,000 barrels per day).

But in the days that followed Wednesday’s deal, a few more wrinkles emerged that could complicate OPEC’s chances of having a meaningful impact on the global oil supply surplus. First, even as the ink was drying on OPEC’s announcement, Iraq’s oil minister disputed the data used to calculate his country’s total oil production. In OPEC’s monthly reports, the group lists production totals using both direct and secondary sources. The discrepancy matters because if Iraq’s production is actually higher than OPEC says it is, then Iraq should be allowed to produce more under any hypothetical allotment apportioned to it after November’s meeting.

“These figures do not represent our actual production,” Iraq’s oil minister Jabar Ali al-Luaibi told reporters. If the figures are not corrected by November, he said, “then we say we cannot accept this, and we will ask for alternatives.” If the dispute is not resolved, Iraq’s dissent could sink the deal. Moreover, even if they do iron out the data differences, it will probably need to be in Iraq’s favor, considering the minister’s insistence.

Needless to say, there are a lot of uncertainties after the Algiers announcement, which helps explain why the oil price rally ran into a wall less than 48 hours after the agreement, stopping short of $50 per barrel.

Related: How Long Will OPEC Hot Air Continue To Fuel Oil Prices

"I think what this really is is an agreement to agree at some point two months from now, and there are big questions around the allocations. Is this a freeze or a cut? What's the real deal with Iran going to be? And who was absent? It was the Russian oil minister that left," energy analyst and oil historian Dan Yergin told CNBC's "Squawk Box" on September 29.

Indeed, Russia remains a big question mark as well. Heading into the Algiers meeting, it was thought that Russia would participate in an OPEC/non-OPEC freeze. Positive comments from top Russian officials suggested that they would go along with market intervention, if only because freezing Russian oil production at record levels would not involve much sacrifice.

But Russia, the world’s largest oil producer (though not an OPEC member), was not part of the closed-door negotiations in Algeria. And Russia’s Energy Minister Alexander Novak said that there were no plans to change output, which currently exceeds 11 million barrels per day, the highest volume in the world and a post-Soviet high. When asked about OPEC’s announced deal, Russia’s Finance Minister said that his ministry was maintaining its assumptions that oil prices would average $40 per barrel over the next three years. “You think it’s stabilized?” Russian Finance Minister Anton Siluanov said to reporters, referring to the oil markets. “We need to see how realistically the decisions will be implemented.”

Related: U.S. Rig Count Rises To 7 Month High

That all sounds like Russia is not all that interested in coordinated with OPEC. With so many crucial oil producers not asked to actually cut production, the question remains how significant the OPEC cuts can possibly be? Given the fact that Iran, Nigeria and Libya are already exempt from any cuts, and Iraq is angling for a higher allotment ahead November’s meeting, the efficacy of any deal will have to come down to what Saudi Arabia alone is willing to cut.

On that front, there might be some hope. Saudi Arabia is anxious about today’s sub-$50 oil prices. The Wall Street Journal reported that Saudi officials said they would cut output if Iran froze at its current 3.6 mb/d. When Iran declined, Saudi negotiators proposed Iran freeze at 3.7 mb/d. That too was rebuffed, and ultimately Saudi Arabia gave in and allowed Iran no limit.

If a deal is actually agreed to in November, it will be because Saudi Arabia has chosen to do the heavy lifting all by itself.

By Nick Cunningham of Oilprice.com

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