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OPEC Agrees To First Cut In Oil Production Since 2008

OPEC Agrees To First Cut In Oil Production Since 2008

The Organization of the Petroleum Exporting Countries will meet in Vienna on Wednesday aiming to implement a deal outlined in September to cut output by around 1 million barrels per day (bpd), from around 33.82 million bpd in October. Resistance from Iran - and from neighboring Iraq - has made the foundations for a deal look increasingly shaky. "The feeling today is mixed". The U.S. Bureau of Economic Analysis finds GDP grew at an annual rate of 3.2 percent in the third quarter, compared with a 1.4 percent increase in the second quarter. Futures would rally into the low $50s a barrel and average $55 over the first half of next year if the group agrees to a cut, according to the bank.

Most Middle Eastern crudes cost between $45 and $48 per barrel - ahead of any production cut accord - a competitive price versus supplies from elsewhere when shipping fees are included.

Iran has stressed that it should be allowed to continue increasing production as its exports recovered from nuclear-related sanctions that were lifted in January following the signing of the JCPOA.

Oil markets remained jittery ahead of the OPEC meeting. They want the best price possible for the IPO, and the only way to get that is to have oil prices increase, so over and above the financial benefit that would immediately be realized, Saudi Arabia also has an additional interest that is compelling them to get a deal done.

The demand picture remains bullish for crude prices, driven by increasing consumption in China and emerging markets.

On Tuesday, the USA benchmark was $1.65, or 3.5 percent, lower at $45.43 a barrel. Infighting can be expected to determine how that 2.65% is divvied up, and, let's remember, this is a group of countries that has been waging proxy or non-proxy wars against each other on an unabated basis for the past 30 years.

With the cut, OPEC's production will drop to 32.5 million barrels a day, effective on January 1, 2017.

In either of the scenarios above, there is downside price risk, whether the correction comes fast and hard following a no agreement outcome, or slower, and shallower in amplitude in the case of a limited output cut, once the initial euphoria gives way to a degree of realism.

International Energy Agency has said that in the absence of a production cut by Opec, the oil market will take longer to rebalance in 2017, extending market surplus into a fourth successive year.

OIL WATCH: The worldwide benchmark for crude oil, Brent, soared $3.80, or 8.2 percent, to $50.18 a barrel as oil ministers from the Organization of the Petroleum Exporting Countries seemed to focus less on whether there would be a cut and more on how it would be shared among members. Iraq wants to be exempted due to its conflict with Islamic state.

He told reporters that the Vienna meeting is wide open, declaring: "We don't have a single path, which is to cut production". "The same goes for Iraq as well".

Failure to hold a meeting Monday between OPEC, non-OPEC - after Saudi Arabia said it would skip the gathering - took away an opportunity for both sides to negotiate the finer details of what they would accept in terms of supply restraints.

Instead of cutbacks, Saudi oil minister Khalid Al-Falih says the Organization of the Petroleum Exporting Countries should do no more than what it has done for almost a decade - sit back and let demand drive up prices "without an intervention from OPEC".

On Tuesday Iranian Oil Minister Bijan Namdar Zanganeh sought to assuage fears the bloc might not come through with an agreed cut - though he did not announce any change in his government's position. The Kremlin so far has resisted requests that it join the cut, offering instead to freeze production at current levels.