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OPEC must address these potential deal killers to sustain oil market’s ‘positive glow,’ analyst says

  • The Organization of the Petroleum Exporting Countries is scheduled to meet on November 30
  • Investors widely expect the producer group to prolong output cuts of about 1.8 million barrels per day beyond its current deadline at the end of March 2018
  • However, there are three pressing issues for the cartel to address
Minister of Energy, Industry and Mineral Resources of the Kingdom of Saudi Arabia, Khalid A. Al-Falih gestures as he speaks during a panel on October 5, 2017.
Sefa Karacan | Anadolu Agency | Getty Images
Minister of Energy, Industry and Mineral Resources of the Kingdom of Saudi Arabia, Khalid A. Al-Falih gestures as he speaks during a panel on October 5, 2017.

OPEC must tackle several unknowns ahead of its upcoming meeting if the oil market's "positive glow" is to be sustained, Stephen Brennock, oil analyst at PVM Oil Associates, said Wednesday.

The Organization of the Petroleum Exporting Countries is scheduled to meet on November 30, with investors expecting the producer group to prolong output cuts of about 1.8 million barrels per day beyond its current deadline at the end of March 2018.

However, there are three pressing issues for the cartel to address.

Exempted members

The first potential stumbling block for OPEC concerns Libya and Nigeria, Brennock said.

The cartel gave both nations a waiver from the OPEC-led agreement because internal conflicts in each country caused significant production declines last year.

However, Nigeria and Libya have added a combined total of 694,000 barrels per day through the January to September period, Brennock said, citing OPEC-surveyed secondary sources. The exemptions have made the producer group's task of eliminating the supply overhang increasingly difficult and has also been "a factor in capping price gains," he said.

Both crude benchmarks notched up monthly gains of more than 5 percent in October. Prices were buoyed by ongoing geopolitical tensions and heightened expectations that OPEC and other oil exporters would extend a deal to limit their oil output.

'Widespread cheating'

A second issue for the OPEC leadership to consider is how best to tackle members' "cheating behavior," Brennock said.

While the current agreement is OPEC-led, cartel members have been bested by non-OPEC producers in recent months. And though compliance has impressed at just over 100 percent of late, the effort has been far from universal.

"Such widespread cheating has only been masked by Saudi Arabia which has led from the front by pumping below its OPEC target," Brennock said.

JOE KLAMAR | AFP | Getty Images

Saudi Crown Prince Mohammad bin Salman said in a statement Saturday that he supports extending the agreement, which aims to keep about 1.8 million barrels off the market through March 2018.

Saudi Arabia is the most influential member of OPEC. The agreement, which took effect in January of this year, also included Russia and a number of other non-OPEC nations.

Iraq, OPEC's second-largest producer, has been the least compliant member of the deal to date. The country has consistently fallen short of its production cut target, despite being scolded by both Saudi Arabia and Russia for its perceived lack of cooperation.

Crude oil supplies from northern Iraq have fallen after the central government took control of oil fields in disputed territories from Kurdish forces.

Higher oil prices

A third issue for OPEC could be rising oil prices. Oil sustained a rise above $60 a barrel this week as investor expectations of an extension to OPEC-led cuts beyond March supported prices.

"Higher oil prices are a blessing for producers but they also make it harder for the organization's members to toe the OPEC line. Accordingly, they may struggle to collectively resist the temptation to cash in on short-term gain," Brennock said.

The price of oil collapsed from near $120 a barrel in June 2014 due to weak demand, a strong dollar and booming U.S. shale production. OPEC's reluctance to cut output was also seen as a key reason behind the fall. But, the oil cartel soon moved to curb production — along with other oil producing nations — in late 2016.

— CNBC's Tom DiChristopher contributed to this report.