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Opec output 'cut' may never happen, say analysts

Published: 22:32 29 Sep 2016 AEST

Algiers, Algeria
Opec oil ministers struck the deal at talks in Algiers

Shares in oil majors rose on Thursday as global investors cheered a surprise production cut by Opec, but analysts warned it may never happen.

BP plc (LON:BP.) lifted 4.2% to 450.6p and Royal Dutch Shell Plc (LON:RDSA) gained 5.6% to 1906.5p as the Middle East oil cartel agreed a preliminary deal to cut output for the first time in eight years.

The move, agreed at a meeting in Algiers, sparked hopes of an end to falling crude prices, which have triggered cuts in oil industry investment and jobs.

The price of a barrel of Brent crude initially rose before settling back to stand 0.35% off at US$48.52, while a barrel of US light crude ticked up 0.04% to US$47.1.

Opec chiefs who have faced criticism for continued failure to stem supplies were quick to hail the move as a potential turning point.

“Opec made an exceptional decision today,” the BBC quoted Iran’s oil minister Bijan Zanganeh as saying.

More rows

But market analysts were not convinced, highlighting potential obstacles to a final agreement.

They pointed to the fact that Opec has not confirmed the fine details, which are set to be hammered at a formal meeting of the cartel in November.

They also highlighted the fact that Opec nations have yet to agree individual production cuts, increasing the potential for more rows.

Disputes between the likes of Saudi Arabia and Iran over who will shoulder the burden of any reduction have led to the cuts hiatus.

Mike van Dulken at Accendo Markets said the fact that oil prices eventually fell after the announcement showed that markets had realised it was only a step towards a potential cut.

“Digging down, it’s merely an intention to agree something concrete further down the line,” he said.

“Details on who will cut and by how much are distinctly lacking and only likely to surface at the end of November.

“There’s plenty of work still to do and enough time to scupper a supposed ‘deal’.”

Soft cut

Output will fall by about 700,000 barrels a day to 32.5mln-33mln barrels a day, compared to 33.24mmbbl pumped in Aug.

But the cuts will not be distributed evenly across the cartel, with Iran being allowed to increase production.

Analysts at Bank of America Merrill Lynch branded that as “a soft output cut at best.”

They said in a note: “We retain our US$61 average Brent forecast for next year.

“Opec's action won't propel prices much above our US$70 mid-year target.”

Marshall Gittler, a foreign exchange analyst at FXPrimus.com, said: “This isn’t all it seems. Iran was exempted from the deal.

“Iran is currently pumping around 3.68mln barrels a day, which is about 11% of total OPEC output.

"Since Iran wants to increase production back up to its pre-sanction level as a percentage of total Opec output, even if we estimate a 13% market share for Iran, which is on the low side, and OPEC cuts production to the low end of its range, that would mean Iran would boost its production by at least 545,000 barrels a day.

“That alone would wipe out most of the supposed cuts.”

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