Hangover awaits as OPEC celebrates biggest accord in years

Bloomberg

Let OPEC celebrate. For now. The oil club is dizzy with its own success after a harmonious meeting in Vienna, where it surprised the world by agreeing to its first production cut in eight years.
In hurried notes just hours after the end of the meetings, analysts joined the party. “OPEC resurrection,” Neil Beveridge at Sanford C. Bernstein & Co. called it. “OPEC is back,” opined Martijn Rats of Morgan Stanley. “OPEC in the driver’s seat,” trumpeted Tudor, Pickering, Holt & Co. Leave it to Abhishek Deshpande of Natixis in London to take away the punch bowl. “OPEC returns,” he said, “but be wary.”
Deshpande, though a party-pooper, is correct that there are many reasons not to get too delirious about the agreement to curtail output by 1.2 million barrels a day, the most prominent being the cheating of OPEC’s own members.
But for now, an industry that’s endured the most painful downturn in a generation is too busy clinking glasses to the latest from the S&P 500 Energy Sector Index, which surged Wednesday more than 5
percent to its highest in a year and
a half. And the bubbly will flow
to mark the end of belt-tighte-
ning for behemoths such as Exxon Mobil Corp. and Total SA. If all goes well, projects of theirs that were delayed only months ago could be approved soon.
It’s the Organization of Petroleum Exporting Countries itself that
will benefit most from the negotiated peace. Amrita Sen, chief oil analyst at Energy Aspects Ltd. in London, said that “even allowing
for some cheating” the deal will
turn an expected increase in inventory in the first half of 2017 into
the opposite. That, in turn, should push up oil prices. OPEC officials have expressed the hope that by midnight on the last day of 2016, oil will be approaching $60 a barrel. That would be a reason for another round of toasts and a happy outlook for the new year, considering that last January, oil was wallowing below $30 a barrel.
Now for the “be wary” part. For all its success in Vienna, OPEC is far from resolving its lingering problems. For one, the agreement depends on self-compliance, and the commitment to cut from key countries, particularly Iraq, is weak. Iran, which was allowed a production increase but agreed to cap it at 90,000 barrels a day, is also showing signs it could go rogue.
“Disagreements persist among OPEC members on how to measure production, so the deal will be hard to police,” said Spencer Welch, a director at consultant IHS Energy.
Saudi Arabia is ready to cut output. But others haven’t, particularly when prices are low. Skeptical traders believe that after a couple months of cuts, cash-strap-
ped Venezuela and Angola will
be boosting production to cash in
on higher prices.