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  October 15th, 2016 | Written by

Will OPEC’s Output Agreement Stick?

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  • OPEC wants to cap production at 33 million barrels per day.
  • The idea behind OPEC production agreements is to get oil prices to rise.
  • Brent crude prices have increased 15 percent since OPEC agreement was announced.

Late last month, the Organization of Petroleum Exporting Countries (OPEC) announced after meeting that it would cap production at 33 million barrels per day. The idea was to put a floor under oil prices and get them to rise.

The move had some of its desired affect, with Brent crude prices increasing by six percent following reports of the deal and a total of 15 percent since the agreement was announced.

The question is whether OPEC will be able to stick to its plan. It’s too early to tell that only two weeks after the deal was struck. But, ironically, numbers released since then show OPEC’s September production at an all-time high of 33.64 million barrels a day.

“The details will entirely determine the efficacy of any collective cut,” said Rory Johnston, a commodity economist at Scotiabank, referring to the fact that the September deal was a tentative one. OPEC plans on reconvening in Vienna in November to cement the accord.

“All else equal,” Johnston cotninued, “this is a bullish development for the oil market. Perceptions of OPEC cohesion took a hit after similar talks in April failed and simply getting members to sign onto an in-principle agreement—the cartel’s first since 2008—should be viewed as an achievement.”

Scotiabank’s Commodity Price Index fell 0.8 percent month over month in September as weakness in the oil and gas sub index overwhelmed minor gains in other core commodities. The oil market remains oversupplied by roughly one million barrels per day, noted a Scotiabank report, global inventories remain at record levels, and producers appear to be slowly adapting to the new low-price reality through a combination of cost reductions and rising technical efficiencies.

“We’re talking about the possibility of relatively small cuts with the potential that further additions from exempted members overwhelm reductions made elsewhere in the cartel,” said Johnston. “That said, any reduction of OPEC’s expected production path puts upward pressure on our current WTI price forecast, which at $45 to $55 per barrel in 2016 to 2017 was beginning to feel a bit high given the mild deterioration of market fundamentals prior to the OPEC announcement. Any near-term upward price adjustment will also bolster the fortunes of non-OPEC producers and the U.S. shale patch may return to positive growth next year.”