The Organization of the Petroleum Exporting Countries has a preliminary plan that would cap oil production slightly below its current pace, but traders are debating whether it will make a lasting difference.
“Any production restraint is a big deal,” said Phil Flynn, senior market analyst at Price Futures Group.
The 14-nation group of major oil producers is targeting a production cap that would hold output to between 32.5 million and 33 million barrels a day. OPEC’s latest monthly oil report pegged current member output at 33.24 million barrels a day. But the output agreement won’t be completed until at least Nov. 30.
To reach that output target, OPEC members would need to reduce the rate at which they’re producing crude oil.
“This downshift is likely to help” rebalance the global oil market, said Robert Haworth, senior investment strategist with U.S. Bank Wealth Management. But the market will still have to “work through the excess of U.S. and OECD oil inventories.”
“For now our view remains that upside here is limited, with prices above $ 50 per barrel likely rekindling U.S. oil production and limiting further prices gains,” he said.
The scale of the production cut isn’t terribly impressive, analysts noted.
“A 2% cut in cartel production is a lawn chair off the Titanic with regards to global supply. Unless OPEC follows up with announcements for the methodology of the cut, the specific magnitude of it, and the intent to enact a program that appreciably affects global supply going forward, expect to see the spot price of oil settle back into the range it’s inhabited since the second quarter of this year.” said Scott Cockerham, managing director at Huron
A study will be done and reported to OPEC at its next official meeting on Nov. 30 in Vienna to figure out exactly how the reductions in output would be implemented, the sources told the newspaper. That essentially means any agreement won’t go into effect for another two months.
“It is better than no agreement, and the market is looking at it that way,” Brian Youngberg, senior energy analyst at Edward Jones, told MarketWatch. “If it was effective today, oil would be even higher.”
Reuters had reported earlier Wednesday that a deal to cap output might be announced, but with details of any such agreement not set to be released until the next OPEC meeting.
Robbie Fraser, commodity analyst at Schneider Electric, conveyed market sentiment at that time very well. He dubbed that news as “the most OPEC announcement ever.”
Oil prices had rallied when the Reuters report came out, then surged much more when the headline news showed that the potential deal translated into a production cut.
West Texas Intermediate crude jumped by more than 5% to settle at a nearly three-week high. Brent crude tacked on almost 6%.
The informal meeting on the sidelines of the International Energy Forum in Algeria had been the oil market’s most-anticipated event since it was announced in early August. OPEC was widely expected to discuss a freeze on its production levels.
Many traders have their doubts that the deal will stick.
Besides, with OPEC production near record high, oil traders and analysts alike aren’t quite sure if an output agreement will make much difference.
Still, Youngberg pointed out that by the November meeting, “Iran should be near its 4 million barrels per day bogey by then, so they would be where they want to be.” Iran has said that it planned to reach pre-sanction output levels before it would consider participating in a pact to cap production.
So, “November may finally make markets happy, but a lot could happen before then,” said Youngberg.