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Robin Mills: Real challenge of the Algiers agreement will be deciding who cuts back
After April’s debacle in Doha, Opec countries will be relieved that last week’s meetings passed without a battle of Algiers. Instead, they reached an unexpected agreement on limiting production. But it will take diplomatic mastery to turn this deal into a full accord with a real impact on oil markets at its congress in Vienna in November. Opec agreed to limit its production to 32.5 million to 33 million barrels per day, down from a Reuters estimate of 33.6 million bpd last month. Iran, recovering from sanctions, and Nigeria and Libya, whose outputs have tumbled because of insecurity, would be allowed to produce at "maximum levels that make sense". The difficult bargaining is yet to come. Will Saudi Arabia, along with its Gulf allies the UAE and Kuwait, be expected to shoulder all the required cuts? Or will they be more evenly distributed? The organisation has not had formal per-country quotas since 2011. A lot has changed since then – Venezuelan production has slumped, Iraq has surged, Iran has been in and out of sanctions and the GCC has ramped up to fill gaps elsewhere. Saudi output would normally fall in winter anyway, as demand for oil to power air conditioning drops, but the kingdom will have to increase production again next summer. With Libyan production recovering in September as oil ports reopened, who will accommodate a recovery from Libya or Nigeria for that matter? While non-Opec Russia could also be part of a deal, its output is also likely to rise sharply in coming months, perhaps by as much as 400,000 bpd as new fields enter service. The idea of roping in Oman and Mexico seems to have faded. And historically, Opec compliance has tended to wane following deals, as the temptation to cheat becomes irresistible. Oil prices gained about 5 per cent on the news of the agreement, sketchy though it remains. Any lasting impact will depend on concluding and implementing an effective deal in Vienna. But announcements so far leave the impression that Saudi Arabia has conceded on two fronts. The Doha talks foundered on Saudi insistence that Iran be part of the freeze, but the Saudis have now agreed that Iran would be exempt from cuts. This concession to Iran may be mostly symbolic – Iranian output has been flat at about 3.6 million bpd since May, well short of Tehran’s aspiration of 4 million to 4.2 million bpd, and does not seem likely to rise much in the short term, until it can attract new international investment. In return, Iran agreed to use third-party estimates of production rather than its own reported figures, but there is little difference between these over the past four months. Iraq, one of the biggest gainers in Opec in recent years, despite its fragile economy and politics, is also a sticking point. The combative new oil minister, Jabbar Al Luaibi, has implied Iraq’s oil output is underestimated by about 300,000 bpd. The concession to shale oil producers is more serious. Opec’s decision in late 2014 not to limit production even as prices fell heralded a strategy of smoking out shale companies. But despite losses and bankruptcies, the drop in US production has been much slower, the fall in costs more dramatic, the continued appetite of financiers greater, than anticipated. American output is still higher than it was in 2014 at the start of the price slump, and shares of share oil companies rose by 8.3 per cent on news of the deal. Why would Saudi Arabia, after its insistence in April, now be more accommodating? A change in thinking within the kingdom’s political leadership, encouragement from Russia, and a greater urgency for immediate finance may have contributed. But with Iran holding its ground and shale oil set to counter-attack, Riyadh takes a risk in proceeding to Vienna before a decisive victory in the oil market. Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis.
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