Reaction to OPEC’s talk of an oil production cut could be read as a convincing win for the resiliency of U.S. shale producers, if not for OPEC itself.

Except that OPEC has something of an image problem. Analysts, experts and industry observers were nearly unified in questioning whether OPEC would implement cuts by its Nov. 30 meeting in Vienna.

OPEC said on its website that it would explore a production target ranging from 32.5 million barrels per day (MMbbl/d) of oil to 33 MMbbl/d.

In making its first production cut in eight years, the cartel expressed concern that oil exporters and companies have seen steep declines in revenues and reduced investment that could lead to a risk to future oil supply.

But few analysts were biting.

“This deal has last minute effort written all over it,” Macquarie Research analyst Vikas Dwivedi said. “Like a bunch of guys that went out too hard on Monday and Tuesday night and scrambled to put something together Wednesday before they got kicked out of their conference room.”

Dwivedi said that the “fuzzy agreement” deserves a dose of incredulity as does the impact it would have should cuts survive until November.

“On the first pass, the ability for OPEC members to keep production at 33 MMbbl/d does not seem achievable,” Dwivedi said. And keeping production below 32.5 MMbbl/d seems out of the question.

Shale Victory?

The manner in which the U.S. industry has responded in the past 18 months, including needed but difficult cost cuts, is commendable, Charles Dewhurst, partner and leader of BDO’s Natural Resources practice, told Hart Energy.

“The overall resiliency of the U.S. industry has come through again and I do believe part of this reaction from OPEC is a response to that resilience,” he said.

Dewhurst said he was pleasantly surprised (but still skeptical) about OPEC’s announcement.

Dewhurst said that the other, more optimistic factor behind a production cut is the overall direction of the global oil industry.

“I think OPEC perceives we’re at a tipping point for a strong rebound,” he said. “But they are concerned about high inventory levels at various points around the world and obviously the U.S. is one of those.”

As prices rise, perhaps into the $60 range or beyond, Saudi Arabia and the U.S. will have different reactions.

For the U.S., E&Ps will take a while to digest the stability and longevity of prices before intensifying drilling.

For Saudi Arabia, the question is how long the tension within OPEC to free up production levels will hold up against the organization’s solidarity.

“The only way it works is for Saudi Arabia to really bear the brunt of the sacrifice,” he said.

What’s The Supply Impact?

Were the deal to hold, it would reduce OPEC production by 480 Mbbl/d to 980 Mbbl/d through 2017, said Damien Courvalin, an analyst at Goldman Sachs.

Wells Fargo Securities forecast predicts a modest supply shortfall in 2017 and 2018 of about 100 Mbbl/d, said Roger D. Read, analyst.

“Thus a cut of the magnitude indicated could significantly reduce global inventories in 2017,” he said.

The deal exempts Libya and Nigeria, beset by instability, from cuts while holding Saudi Arabia to a target while its regional adversary, Iran, would grow. Another 1.6% in production cuts would have to come from elsewhere.

Even if cuts are implemented, they will likely be ineffective long term due to flattening of oil cost curves created by shale.

That will “lead to a loss of pricing power by low-cost producers, leaving them with only volume growth to sustain fiscal revenues,” Courvalin said. “Longer term, we remain skeptical on the implementation of the proposed quotas, if ratified.”

OPEC’s Reconcilable Differences?

From now until Nov. 30, an OPEC committee will have to hash out individual country-level quotas, which haven’t been particularly well enforced in the past.

Pavel Molchanov, an analyst at Raymond James, isn’t buying the deal at all.

“We’ll believe it when we see it,” he said in a Sept. 28 report.

OPEC members’ motivations may be a factor.

“One can easily imagine the complications involved with, above all, reconciling Saudi Arabian and Iranian agendas,” he said, adding that it isn’t clear whether OPEC’s cuts are contingent on cooperation from non-OPEC producers.

Real Deal Or Ruse?

Barclays analyst Michael Cohen said the agreement is significant, but is also nothing more than a “face-saving measure” for Saudi Arabia.

“We believe that what OPEC is now officially saying it will do, it had been planning to do anyway,” Cohen said. “Saudi Arabian output was forecast to fall in the aftermath of peak power burn needs, and structural efficiency gains have seen demand fall an average of 160 Mbbl/d.”

Cohen said that he views the announcement with a healthy dose of skepticism and only points to some OPEC members’ self-preservation.

“We have long held that certain countries in OPEC are at or near their peak already and would not likely be willing to crush the market by supplying more than is demanded,” Cohen said.

Whether the informal deal is realized in November, “we think that OPEC achieved its objective today by keeping a more solid floor under prices until they meet again.”

The Placebo Price Effect?

Whatever happens with OPEC’s cap on production, freezing production near record levels isn’t likely to cure the oversupply of oil, “especially when global petroleum inventories are at record highs,” Fadel Gheit, an analyst at Oppenheimer, said.

“We remain skeptical of the agreement and more so of its implementation,” Gheit said.

OPEC invited much of its current economic pain on itself in response to the shale revolution. To stamp down on shale production growth, OPEC decided in 2014 to move from maximizing revenue to market share.

While dozens of E&Ps sought bankruptcy protection in the past several months, it also forced companies to reduce costs, improve efficiency and live within their means, Gheit said.

“These initiatives combined with service cost deflation have made shale oil producers much more resilient to low oil prices than ever before,” he said.

Final Word

“Whether or not the agreement will be implemented as reported almost does not matter today,” Read said. “However, it will likely matter in coming days/weeks/months and puts an even greater focus on the next meeting at the end of November.”

Darren Barbee can be reached at dbarbee@hartenergy.com.