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The simple reason why any OPEC deal 'wouldn't hold anyway'

Oil markets are on tenterhooks to see if major oil producers meeting in Algeria can come to any kind of deal over freezing oil production in order to support prices, but many doubt that such a deal – even if reached at the 11th hour – could hold anyway.

This week have been dominated by an informal meeting of major oil producers on the sidelines of the International Energy Forum in Algeria. There were hopes that OPEC, alongside other influential non-OPEC producers such as Russia, could agree to a possible production freeze deal that would support oil prices.

However, crude futures fell about 3 percent on Tuesday after Iran rejected an offer from Saudi Arabia to limit its oil output in exchange for Riyadh cutting supply, dashing hopes for a compromise.

Iranian Oil Minister Bijan Zanganeh attends the 15th International Energy Forum in Algiers on September 27, 2016, on the eve of an informal OPEC meeting the next day.
Billal Bensalem | NurPhoto | Getty Images
Iranian Oil Minister Bijan Zanganeh attends the 15th International Energy Forum in Algiers on September 27, 2016, on the eve of an informal OPEC meeting the next day.

Jim McCaughan, chief executive of Principal Global Investors told CNBC on Wednesday that he didn't think "a deal would hold" anyway.

"Even if they purport to have a deal in Algiers, I don't think it will hold for very long because there's so much incentive from various cash-strapped oil producers to produce more so even a formal deal would fall apart," McCaughan said.

"That puts a downward pressure on the oil price for the near-future even if there is a financial bounce on a purported deal."

Time is running out for a deal too with the forum due to end on Wednesday. Members of OPEC are expected to hold talks today at 15:00 London time.

McCaughan believed that oil markets needed to get used to lower oil prices due to increasing efficiency in the industry and that OPEC was "increasingly irrelevant."

OPEC producers – notably the so-called "fragile five" of Nigeria, Libya, Algeria, Venezuela and Iraq but also the larger members like Iran and Saudi Arabia – are feeling the pinch from sustained lower oil prices caused by a glut in supply and that would outweigh any bid to stabilize oil markets, McCaughan added.

"They will produce (oil on demand) because many of those oil producers need the cash…Look at Russia, look at Iran, they need the cash and they're going to do what they need to do to get that cash."