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Gulf members try to shore up Opec's credibility

But a pathway out of the cuts is still not clear

Opec's big guns are pulling out the stops. It should do the trick, tightening physical supplies and inflating the price this quarter, at least until refining maintenance kicks in again. But the big question remains: what is the end game?

For now, the policy is reactive, not proactive. Opec needed to do something and has.

The backdrop to its latest meeting in St Petersburg earlier this week wasn't pretty. Compliance with the cuts has started to creak. Brent, at around $48 a barrel on the eve of the summit, had fallen by more than 10% since Opec and its non-Opec partners agreed in May to extend their deal. Market sentiment in recent months has been deeply bearish.

Bigger problems have been building. Russia, it is understood, was unhappy that the production recovery in Libya and Nigeria had neutralised much of the cuts' impact. Its implicit threat was that Opec needed to put its house in order—or it might walk. Reports surfaced that, under pressure from Moscow, Riyadh would consider trimming more supply.

So it will. Saudi exports will fall to 6.6m barrels a day in August. Sceptics will say the new cuts reflect only the domestic crude-burning season in the kingdom, and would have happened anyway. But as far as tweaks to the existing deal go, this is a big deal, whichever way you dice it. The last time the kingdom's exports were as low was in May 2011. It breaks what was said to be a redline minimum of 7m b/d of exports. It's a drop of about 0.5m b/d compared with its average for the year up until May; and 0.7m b/d less than in August 2016.

Adding force, the UAE will cut supply by 10% in September—its oil minister tweeted the news and said his customers had been told. On 26 July, Kuwait reportedly jumped aboard too, pledging to cut its supplies as well.

The announcements since Petersburg have been worth a couple of dollars on the price. But a rally can only go so far. Significant inflation above $50/b would bring too much verve in the tight oil sector—just when it is starting to wobble again. But if the Gulf producers come good on their pledge then about 1m b/d of supply that would have reached the market won't.

Yet the latest tactical trimming can't mask some of Opec's other problems. First, Russia's hold over the group is now plain—quite an achievement for a non-member. It has cut less than half the volume Saudi Arabia has removed, but is still able to influence policy.

Second, as ever Saudi Arabia and its Gulf allies are left to do the heavy lifting. Tiny Ecuador's decision to stop cutting won't cause these countries much distress. But Iraq, which has already said it will pump more this year and has been a compliance laggard, will. It's hard to see how Baghdad can be strong-armed into sticking with the cuts if it decides they've run their course.

Lastly, Opec still has to figure out a way to end the cuts. It hopes that demand growth and the past two years' pull-back in upstream investment will yield a dearth of new production, leaving Opec's oil riding to fill the void. But this can't be a reliable strategy. Time and again in recent years the market has surprised Opec.

Indeed, expectations of a supply gap, wrote Barclays' head of energy market research Michael Cohen recently, are "the glue that keeps the Opec deal together". But what if, as Cohen predicts, this supply gap will not be "as big or as soon" as people thought? Other forecasters, he says, "still fail to grasp the size and economic viability of the US resource base".

Tight oil remains an oil-price-inflation killer: a reserve of economical oil able to snuff out rallies just when they gain momentum. If that means prices can't move much higher, Opec's main task will be to make sure they don't drop much lower. And without an exit strategy, the group knows that terminating its cuts would just open up a wave of its own supply, undoing all the work to create a price floor.

What does the end look like? Is it when OECD stocks are at their five-year average? Is it at $55/b or $60/b? What happens to the inventory when Opec stops cutting? What happens to prices? No one is sure, because Opec, rife with members desperate for short-term relief, doesn't seem to be looking that far ahead.

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