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Column: The OPEC+ deal looks sensible in theory, challenging in reality

LAUNCESTON, Australia (Reuters) - The agreement by the OPEC+ group to gradually increase production is one of those deals that seems sensible and has reasonable aims, but will actually be difficult to pull off in reality.

FILE PHOTO: A 3D printed oil pump jack is seen in front of displayed Opec logo in this illustration picture, April 14, 2020. REUTERS/Dado Ruvic/Illustration

The producer group, made up of the Organization of the Petroleum Exporting Countries and others including Russia, reached a deal to ease their current 7.7 million barrel per day (bpd) of output cuts by 500,000 bpd in January.

The grouping will then review on a monthly basis whether to continue the gradual increase in production, or whether to pause, presumably determinant on prevailing market conditions.

In effect, what OPEC+ is trying to do is achieve a trifecta of increasing their volumes, keeping prices at least at current levels, and finally not surrendering market share to producers outside the group, such as the United States and Brazil.

Initial market reaction to the deal was positive from a price perspective, with global benchmark Brent crude futures rising as much as 1.4% on Thursday to $48.94 a barrel, before ending at $48.77, the highest close since early March.

In effect, the market is saying it has some confidence in the ability of OPEC+ to return supplies to the market at more or less the same pace as demand is likely to grow as the world starts to recover from the novel coronavirus pandemic.

The problem with this view is that it assumes a whole range of factors are somehow within OPEC+’s control, which they are not.

With the coronavirus still prevalent in much of Europe and in the United States, the hopes for a rebound in demand lie pretty much with Asia, which as a region has done a far better job of containing the pandemic.

The problem for crude oil bulls is that the reason Asia has done better is that they have strictly curtailed travel between countries and often domestically as well, encouraged work from home and social distancing.

None of these tactics point to higher crude oil demand, and with a vaccine still some way off for the wider public, it may be optimistic to think demand is going to start recovering strongly from January onwards.

U.S. SHALE, NORWAY

Another factor largely beyond OPEC+’s control is how will U.S. shale producers respond to the signal of higher prices.

Past experience suggests they will start to pump more crude, gradually at first but accelerating over time if the price gains seem to be holding.

Norway, a producer outside of OPEC+, has also said its voluntary output cuts will not be rolled over when they expire at the end of December, potentially adding 300,000 bpd to the market.

What this likely means is that more than OPEC+’s 500,000 bpd may be added to the global markets in January, at a time when it’s still too early for the multiple vaccines to have had any impact on boosting travel, or on opening borders.

There is also the question of compliance by OPEC+ members, although so far this has been reasonable, with 102% compliance in November among OPEC members subject to quotas.

But the temptation of higher prices may be enough to loosen adherence, especially among members who were opposed to extending the current cuts in any form.

Overall, while the OPEC+ deal appears like a reasonable compromise, several factors outside the group’s control will also have to fall into place for it to be as bullish as the initial market reaction has assumed.

-- The opinions expressed here are those of the author, a columnist for Reuters --

Editing by Stephen Coates

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