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OPEC deal more about balance than price

If oil prices move too high, oversupply risks re-emerge with the resurrection of U.S. shale.

By Daniel J. Graeber
OPEC agreements do more to work on addressing an oversupplied market than unleash the cork on crude oil prices, analysis finds. Photo by Dalbri/Wikimedia
OPEC agreements do more to work on addressing an oversupplied market than unleash the cork on crude oil prices, analysis finds. Photo by Dalbri/Wikimedia

NEW YORK, Dec. 1 (UPI) -- An OPEC agreement to limit oil production for the first time in nearly a decade does more to erase a market surplus than support higher prices, analysis finds.

Members of the Organization of Petroleum Exporting Countries concluded meetings in Vienna with an agreement to cut production by 1.2 million barrels per day to align with a proposal put forward in Algeria. That cut matches what OPEC expects for world oil demand growth through next year.

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The proposed cut is contingent on a number of factors, including cooperation from non-member states like Russia. On the back of the news, crude oil prices staged one of their largest rallies in years, with the price for Brent at one point surging 10 percent in midday trading Wednesday.

A research note from Goldman Sachs said that while the guidelines are substantial, a true catalyst for a major rebound in crude oil prices would have to come from verified compliance and more clarity from member states like Iran. Goldman said there are conflicting narratives on cooperation from some OPEC producers.

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"We reiterate our view that this is a short duration cut, targeting excess inventories and not high oil prices, which would instead unleash a sharp production response both in the United States and in the rest of the world," the note read.

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Before the deal was reached, Qatari Energy Minister and OPEC President Mohammed Bin Saleh al-Sada said there were signs the market situation was returning to balance. Data from the U.S. Energy Information Administration show total crude oil stocks relatively unchanged from the last week in October, suggesting market pressures were indeed correcting some of the supply-side pressures that dragged oil prices to below $30 per barrel in early 2016.

Fitch Ratings in a research note said the oversupply should erode through next year as supply and demand start to balance out. With questions lingering still over which country will do what under the agreement, and how much output countries exempt from the deal like Libya and Nigeria can contribute, the ratings agency said there are risks the OPEC production agreement won't work as planned.

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"Significant risk remains that OPEC members will produce crude above quotas, as has happened in the past," it said. "This could slow market rebalancing."

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