Investing.com – Despite the fact that the Organization of Petroleum Exporting Countries (OPEC) outlined a deal for what would be the first oil production cut since 2008, experts were skeptical that the agreement would materialize or even have a material impact.
The oil cartel reportedly reached an agreement to limit production to a range of 32.5 million to 33.0 million barrels per day (bpd), a reduction of 200,000 to 700,000 bpd from its current output of 33.2 million barrels.
However, the 14-member oil group said it will wait until the official OPEC meeting in Vienna on November 30 to finalize the decision, when an invitation to join cuts could also be extended to non-OPEC countries such as Russia.
The lack of details sparked skepticism among the experts on Thursday as to whether members would agree to the cut requirements allocated to them in two months’ time.
In that light, Goldman Sachs left its forecast for U.S. crude unchanged at $43 a barrel for the end of this year and $53 a barrel in 2017, pointing out that compliance to quotas was historically poor, especially in a context where oil demand was not week.
“If this proposed cut is strictly enforced and supports prices, we would expect it to prove self-defeating medium term with a large drilling response around the world,” these analysts added.
Indeed, U.S. oil rigs had already been ramping up production. According to oil service provider Baker Hughes’ latest data, the number of active rigs drilling in the U.S. increased in 12 out of the last 13 weeks.
UBS also noted that the implementation of the cuts to output, their duration and how the quotas will be allocated between members was unclear.
Morgan Stanley expressed that the reduction in output does not address oversupply in an immediate fashion.
Experts from Blackwell Global agreed, stating that a 700,000 bpd would only reduce production to early 2016 levels, relatively close to the long run high for oil supply.
“Additionally, this level of production is unlikely to have much in the way of a medium term impact on global oil prices given that much of the supply glut will need to be hoovered up first and this could potentially take quite a few months to flow through the supply chain,” they added.
Michael Hewson, chief market analyst at CMC Markets, also showed pointed to OPEC’s poor track record of complying with quotas and noted that an “official deal” was still two months away.
“If anything this looks like another attempt to keep a floor under prices without actually having to do anything,” he said.
ADM Investor Services analyst Marc Ostwald seemed to be thinking much along the same lines.
He said the so-called deal “looks to be of the ‘we must agree something, however vague and lacking in specific detail’, with the fear that downward seasonal pressures would send oil prices into a renewed downward spiral the clear motivating factor.”
After spiking more than 5% on the news of the framework for an agreement in the prior session, investors showed caution on Thursday due to the lack of concrete details.
U.S. crude oil futures fell 0.40% to $46.86 at 5:57AM ET (9:57AM GMT), while Brent oil traded down 0.67% to $48.91.