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OPEC output freeze deal in doubt again, keeping markets on edge

Saudi Arabia to do heavy lifting if OPEC delivers: Pro

The oil market is taking a breather after the past month's rally sparked by hopes of an OPEC output limit, details of which are due to be hammered out at a November meeting.

The bullish outlook on the back of hopes of a coordinated output freeze was tarnished on Sunday after Iraq it should be exempt from the proposed deal, casting doubts over the oil group's ability to execute get the agreement across the line.

Benchmark U.S. West Texas Intermediate and European Brent crude oil prices were flat on Friday in Asia, moving around $50 a barrel for both grades. They had settled 1 percent higher in the U.S. session after Reuters reported that energy ministers from Saudi Arabia and the Gulf told their Russian counterpart they were willing to reduce peak oil output by 4 percent.

But experts remain skeptical that the oil cartel and non-member oil producers will be able to agree any freeze on output.

"There is a lot of enthusiasm after the Algiers accord where OPEC announced an output cut but since then we're seeing a few cracks emerging here and there," Harry Tchilinguirian, head of commodity market strategy at BNP Paribas, said. "I think OPEC has a long road ahead of it and the discussions that are going to be held in the November 30 meeting are going to be not only difficult but probably acrimonious."

OPEC logo at its headquarters in Vienna, Austria.
Heinz-Peter Bader | Reuters

Iraq had already kicked up a fuss Saudi Arabia-led OPEC's plan to set quotas when it met in November in Vienna. Iraqi Oil Minister Jabar Ali al-Luaibi then doubled down on Sunday, arguing that his country could not cut production because it badly needed oil revenue to fight the Islamic State. Iraqi forces are currently trying to dislodge from Mosul, Iraq's second-largest city and ISIS's last stronghold in Iraq.

Tchilinguirian expects a watered-down agreement from OPEC as a result.

"The best they could do is to produce a small cut," he told CNBC's "Squawk Box". "I think it's important just for the credibility of this organization to keep it going. What OPEC effectively delivers in terms of the amount of cuts is likely going to be disappointing."

Oil prices would likely fall back to the mid-$40s-a-barrel level on likely market disappointment over the eventual terms of the deal, he added.

Aside from the OPEC meeting, oil prices will also face renewed pressure from a higher dollar because the Federal Reserve is expected to hike interest rates in December, said Tchilinguirian. A stronger greenback weighs on oil because the commodity is traded internationally in dollars.

"The Fed is going to have to move. They painted themselves into a corner so they've been looking excuses all year long: Chinese equity markets at the beginning of the year, Brexit, U.S. elections," he said. "At this point in time, they are not going to go in November, but Janet Yellen is going to have to pull the trigger in December."

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