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Will Opec surprise the market?

Deeper-than-expected cuts are on the table and the momentum is behind a deal

All the signals from Opec point to a deal on 30 November that will sharply cut supply, possibly removing more oil than was implied by the end-September Algiers agreement. The group and its core Gulf producers have tired of sub-$50-a-barrel oil and they will shoulder the burden of the cuts. Non-Opec countries, including Russia, may also take part.

After a technical meeting to iron out details on 22 November, sources in Opec's secretariat briefed reporters that group-wide supply would fall by 4-4.5% against what secondary sources said was October output of 33.6m b/d.

In theory, that could amount to cuts of more than 1.1m b/d, taking supply to around 32.5m b/d (see table), though deeper cuts of up to 1.4m b/d have also been discussed. It is understood that Russia, Azerbaijan and Kazakhstan have also committed to removing 0.6m b/d from supply. The deal would last for six months; enough time, Opec believes, to fertilise the seeds of a price recovery in the first half of 2017.

The diplomatic toing and froing, especially from secretary-general Mohammad Barkindo, has helped cajole a workable agreement. All Opec members have been part of the technical discussions, making a deal at the end of the month all the more likely.

The shift in the Saudi position has been decisive. Assuming the deal is now agreed on 30 November - almost two years to the day after Ali Al-Naimi persuaded Opec to let prices slide - the kingdom's reversion will be complete.

The market still doesn't buy all this. The collapse of April's Doha freeze talks and repeated efforts by Opec ministers to talk up the price have left many traders sceptical of the group's promises. Meanwhile, production has soared. Saudi Arabia and Kuwait have even discussed restarting 0.5m b/d of supply in the Neutral Zone.

Public divisions between Opec members have added to doubts. Disagreements over whether the secretariat should use secondary sources to establish monthly production levels or, as Iraq has insisted, members' own declared volumes (which tend to be higher) have painted a picture of dysfunction. Front-month Brent rose as rumours of Opec's new deal hit the market on 22 November, but remained below $50/b a day later.

But this kind of bickering, coupled with maximalist production claims and plans, is how Opec deals unfold. Far from preventing agreement, they imply a painful birth. Many traders and members of Opec's press corps weren't around the last time the group cut a deal. Older hands can tell you: this is how it happens.

That doesn't, though, guarantee the ministers will sign off a deal on 30 November - or that it will be successful.

First, Opec must prepare for disappointment from the non-Opec members that, it is understood, have pledged to support it with cuts. The deal is understood to include a pledge from Russia not just to freeze but cut production, by up to 300,000 b/d. If so, the agreement could flounder.

A crucial question is whether Russia will cut from its projected output in the first half of 2017 or by current production. The same applies to Kazakhstan and Azerbaijan. All three countries can slow or halt upstream growth more easily than they can cut it. In Russia's case, it might freeze production but increase supply - of products into Europe or, if domestic demand doesn't increase, crude its refineries don't need.

The second problem is internal to Opec. Libya, Nigeria and Iran will be exempt from cuts (although Iran, it is understood, will commit to a maximum 3.9m b/d). If all three countries add 300,000 b/d, as they say they can, Opec's 1.4m b/d supply cuts will amount to just 0.5m b/d, net.

It might not pan out that way. Post-sanctions Iran added 0.6m b/d between January and May but has since petered out. Production was 3.7m b/d in October but 3.9m b/d any time soon looks difficult. The politics in both Libya and Nigeria, meanwhile, leave supply risks slanting again to the downside.

Consider also Angola. Its October output was down about 170,000 b/d on September. New projects will add another 150,000 b/d in 2017. Where will that fit into the planned cuts?

Baghdad still insists that its cuts should come from the volume it said it was producing in October (4.78m b/d), not the lesser number estimated by secondary sources (4.56m). If Iraq cuts from the higher number, the market won't think it's cutting at all.

If several countries end up with exceptions and maximise their potential output, the net cuts from Opec could amount to almost nothing.

Lastly, the success of the deal will be decided by producers' reaction to a post-deal price rise. Stronger prices have always tempted Opec members to break their quotas. Brent above $55/b would also coax more tight oil out of the ground.

Still, those are problems for later. For the first time since 2008 Opec wants to take oil off the market. The volume will be less than half that removed eight years ago. But it should put a floor in prices in 2017, probably at around $50/b. Non-Opec, especially tight oil, will be left to fix the roof.

How deep: Opec's output and possible cuts ('000 b/d)

  2015 Oct 2016 (secondary sources) October 2016 (direct communication) 4.5% cuts vs October secondary sources (excluding Libya, Nigeria and Iran) 4.5% cuts with all exceptions
Algeria 1,109 1,088 1,171 1,039 1,039
Angola 1,753 1,586 1,507 1,515 1,672 (a)
Ecuador 544 549 542 524 524
Gabon   202 202 (b) 193 193
Indonesia 696 722 722 (b) 690 690
Iran 2,837 3,690 3,920 3,690 3,900 (c)
Iraq 3,929 4,561 4,776 4,356 4,561 (d)
Kuwait 2,728 2,838 3,000 2,710 2,710
Libya 404 528 528 (b) 600 (e) 900 (f)
Nigeria 1,851 1,628 1,476 1,628 1,851 (g)
Qatar 668 646 639 617 617
Saudi Arabia 10,108 10,532 10,625 10,058 10,058
UAE 2,853 3,007 3,188 2,872 2,872
Venezuela 2,369 2,067 2,316 1,974 1,974
Total 31,849 33,644 34,612 32,465 33,561
Amount cut       1,179 83

Source: Opec

(a) Assumes Angola cuts from September, not October, baseline

(b) Did not submit estimate October output to Opec

(c) Supposed short-term limit for Iran in new Opec deal

(d) If Iraq is allowed to cut from direct communication for October, as opposed to secondary-source estimate

(e) Most recent output, according to National Oil Company

(f) End-2016 National Oil Company target

(g) Assumes return to January output, before resumption of Niger Delta hostilities

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