The Organization of the Petroleum Exporting Countries on Wednesday committed its fractious members to their first oil production limits in eight years. Now comes the hard part. OPEC has agreed to cut production by about 1.2 million barrels per day, or about 4.5 percent of current production, to 32.5 million barrels per day. Top oil exporter Saudi Arabia faces the unenviable tasks of policing cartel members and keeping crude prices within a range that will relieve pressure on oil-producing countries' economies, but which will dissuade non-OPEC producers from increasing output. Analysts broadly expect an agreement to boost oil prices above $50 a barrel and keep them there. Prices have wavered between about $40 and $54 since the spring. Commodity watchers also believe the deal will set up a long-awaited balance between oil supply and demand in the first half of next year. The market has been oversupplied for more than two years, by as much as 2 million barrels a day.



The OPEC producers are close to being capped out, and the ones that do have significant spare capacity continue to face security problems that will likely imperil any ramp-up plans in the near term. research note RBC Capital Markets

But OPEC now has a difficult needle to thread. Oil rigs began popping up in U.S. oil fields when prices approached $50 a barrel, and analysts believe high-cost producers outside OPEC will further ramp up production if crude prices rise above $55 a barrel. That includes U.S. shale drillers, which have built a backlog of partially completed wells in anticipation of a price recovery. Once prices rise, they could switch on that production-in-waiting. While many see oil prices averaging between $50 and $55 next year, analysts are not united on the path to that level. Goldman Sachs believes the deal will cause crude prices to spike in the first half of 2017, and then moderate in the second half as both OPEC and U.S. shale producers capitalize on the rally. But JPMorgan sees prices rising slowly but steadily quarter after quarter. The bank cautioned that the deal is essentially aimed at preventing an even larger buildup of oil stockpiles. The world's storage facilities are brimming with crude and refined fuels. Accommodations the cartel offered to Iran, Libya and Nigeria would mean that total OPEC production will likely increase next year, even as other members cut output in the first part of 2017, JPMorgan said. Libya and Nigeria were granted exemptions because they have experienced significant supply outages due to internal conflicts. Iran agreed to freeze production near current levels rather than cut as it rebuilds its market share following the lifting of sanctions earlier this year.

Skeptics have long warned that OPEC members are notorious cheaters and may not stick to quotas agreed to on Wednesday in Vienna. But RBC Capital Markets said adherence may not matter so much this time for a simple reason: OPEC members are near full-tilt, and they don't have much more capacity to pump. "The OPEC producers are close to being capped out, and the ones that do have significant spare capacity continue to face security problems that will likely imperil any ramp-up plans in the near term," RBC wrote in a note. "Libya and Nigeria collectively have more than one and a half million barrels that are currently off the market, but neither of these countries is close to resolving the political and security problems that have shut in output."

Little respite from non-OPEC members