Analysis: Compromise and promise in Vienna

Today's agreement among Opec members to cut production required compromises from Saudi Arabia, Iran and Iraq.

Meeting in Vienna, delegates agreed to cut output from October levels by 1.2mn b/d to 32.5mn b/d for an initial six months from 1 January, subject to non-Opec producers agreeing to cut by 600,000 b/d.

But the prospect of quickly cutting into the crude supply overhang and benefitting from prices they calculate will gravitate around $50-$60/bl - rather than the $35/bl Algeria forecast would result from a failure to agree – sweetened the pill.

Saudi Arabia pulled back from its insistence that Iran cut along with other members, which had rendered the Doha meeting of producer countries in April a shambles. But it has secured promises of cuts from two more potent threats to its market share – Iraq and non-Opec Russia. In Algiers in September, Iraq insisted it would not accept secondary sources as the basis for any output restraint. And later it suggested it should be exempt from cuts because of its war against Islamic rebel group Isis. Finding itself isolated, Iraq backed down and has accepted a sizeable cut, based on secondary source numbers, of 210,000 b/d. More importantly, for the first time since 1990, Iraq has been incorporated into an Opec production allocation scheme. No longer will it be able to pursue output growth unfettered. That will crimp its ability to challenge Saudi Arabia's market share in the Asia-Pacific region.

It requires a leap of faith to believe that Russia will deliver on the pledge Opec says Moscow has given – to cut production by 300,000 b/d rather than just freeze at current record levels of some 11mn b/d. But if Moscow confirms and honours that pledge, its threat to Saudi market share in Asia-Pacific will also be trimmed, even if only for a few months. So, while apparently acceding to the pleas of poorer member countries to release Opec from the strategy of chasing market share rather than prices, Riyadh has moved to secure its own market share in key markets.

An additional plus is that Riyadh's allocated cut of 486,000 b/d is not proportionally greater than that of other big producers in Opec. And it stays just above the 10mn b/d level that brought gasps when it was breached earlier this year.

Libya and Nigeria have been exempted from cuts, as expected, because of their internal security crises, and Angola has been allowed to base its cut on September levels because of heavy October maintenance. But the exemption that matters is that of Iran. It is allowed to boost output over the six months by an average of 90,000 b/d, winning acknowledgement of the principle that it should regain pre-sanctions output before being subject to restraint. That the outright level it has agreed to produce at is 3.797mn b/d rather than around 4mn b/d is a secondary issue at this juncture.

Cash-strapped Iraq has had to back down but a sustained and substantial price rise will be its reward. It will now be looking to maximise the benefit by ensuring that as much as possible of its cut comes from state-controlled fields rather than those run by foreign oil companies that it would have to compensate. Whether it can persuade the semi-autonomous Kurdistan Regional Government to shoulder any of the cut waits to be seen.

And will the deal deliver on its declared aim of speeding a rebalancing of the market? In the absence of a cut, Argus estimates that the crude overhang in the first half of 2017 would be 1mn b/d, dropping to 500,000 b/d in the second half. If Opec members honoured their pledges but non-Opec producers did not, there would be a crude deficit of 500,000 b/d in the first half, rising to 1mn b/d in the third quarter. And if global producers did cut 1.8mn b/d, the first half deficit rises to 1.1mn b/d in the first half and a chunky 1.8mn b/d in the second half.

The deal also has political dividends for some. Algeria has reinforced its reputation as the consummate diplomatic wheeler-dealer – the agreement was based on its proposals. And the embattled Venezuelan government that has lobbied long and hard for production restraint may find some of its credibility at home bolstered.