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OPEC meets today, may end up taking a tough decision on cuts

OPEC meets November 30, in an attempt to reach some form of production freeze deal, but amid a number of disputes that make agreement very difficult.

There are short-term incentives, under the pressure of summitry, to come up with something — anything! — but the underlying problems mean that any deal reached is unlikely to have much substance or longevity.

There are a plethora of problems. First and foremost, Saudi Arabia has nothing to gain from acting alone. It could reverse its market share strategy, and resume its traditional role as swing producer, but this would only serve to rejuvenate non-OPEC production.

Moreover, future growth in Iraqi and potentially Iranian output means that Saudi Arabia would face competition not just from non-OPEC producers, but internally within OPEC.

Even short-term production constraints fly in the face of Iraq and Iran’s medium-term growth ambitions.

More broadly, the need to monetize oil reserves has become more pressing, not just because of short-term budgetary requirements, but because of the possibility that low carbon energy initiatives will eventually see oil demand start to decline.

As a result, whether OPEC can function as a cohesive organization is going to depend in future on whether Saudi Arabia, Iran and Iraq can find common ground.

The basic rule on this is that they must all benefit or suffer equally from any policy position, not least because Saudi Arabia and Iran are locked in various proxy wars in the region and it is oil money that funds them. But both Iran and Iraq view themselves as special cases. Iraq is still fighting Islamic State, Iran is recovering from sanctions. Whatever the legitimacy of their claims, either historically or based on current problems, exemptions mean unequal burdens.

Moreover, Iran and Iraq are not the only special cases. Libya and Nigeria too have claims for lenient treatment. Libya is very slowly, in fits and starts, raising production, hitting an 18-month high of about 600,000 b/d in October. Nigerian output remains below capacity because of further outages at one of its main Niger Delta export grades. Together they have about 800,000 b/d of production that could come back on-stream in the relatively near future; equally, output could be hit by further instability. The unpredictability of production from Nigeria and Libya makes concerted action by Iran, Iraq and Saudi Arabia all the more necessary, if an OPEC deal is going to have any real impact.

Russian participation is contingent on unanimous agreement within OPEC and even then offers little — a freeze in Russian output at record levels, when little further growth is expected.

This suggests that the actual numbers probably now mean less than the principles, if any, that this meeting establishes. If agreement can be reached between Saudi Arabia, Iran and Iraq, it might suggest a return to a more traditional OPEC policy in which all three are prepared to act together as swing producers. If such a message could be engineered, oil prices would probably rise, but agreement and implementation are two different challenges, and it would be a shaky, unstable coalition at best.

If OPEC fails to agree anything, oil prices are likely to fall, and OPEC’s credibility as an organization will be tarnished further. The most likely outcome is, of course, the middle ground — a face-saving fudge, which the market may well buy for a time.

Ironically, free market competition is the only route by which OPEC can re-establish its control over the market, and create sufficient space to meet the growth ambitions of its major producers. It is also the toughest route, but one that OPEC will probably end up taking in spite of itself.