(Ecofin Agency) - Oil prices increased by about 7% last week, after the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC oil producers announced plans to cut production to between 32.5 million and 33 million barrels per day in Algiers. These major oil producers are planning to meet in Istanbul from October 8 to 13 for informal talks on how to execute the production deal. Francis Perrin (photo), the chairman of Strategy and Energy Policy and the Editor of Arab Oil & Gas, spoke with Agence Ecofin on the way forward.

Agence Ecofin: OPEC gave us a surprise last week Wednesday, when they decided to collectively cut output by 700,000 barrels a day while non-OPEC states would reduce production by another 500,000. Do you think this is possible, as the IEA has said if they could reduce output by 700, 000 the oversupply in the world market will disappear by the end of 2016?

Francis Perrin: We have to be cautious on this issue. It is perfectly true that the decision by OPEC to cut its production in order not to exceed a volume of 32.5-33 million barrels per day of crude was a real surprise and an important development. But OPEC reached an agreement about the elements of an agreement, to quote the Algerian Energy Minister. The organization will have to formally adopt an agreement at the next meeting of its Conference, which will take place in Vienna on 30 November.

AE: What do you think will be the main challenges?

FP: Between now and the end of November, the main challenge for the 14 OPEC-member countries will be to convert this global production ceiling into targets for each producer and we know that it is not an easy task. Another challenge will be to go on discussing with several non-OPEC countries, including of course Russia, in order for them to make some similar announcements. A third challenge will be to fully implement the future agreement. The meeting in Algiers was an important step forward but it was not the end of the story.

AE: The decline in oil price has affected economies as well as the prices of many other commodities. What impact do you think the decision will have on market stability?

FP: If we assume that OPEC really cuts its crude oil production by about 700,000 barrels per day and that some non-OPEC countries collectively reduce their own output by 500,000 b/d from the beginning of 2017, it would be very significant and these initiatives would effectively help in ending the oversupply of oil. Let us remind that world oil demand is increasing and that non-OPEC supply is declining due to very low oil prices. These trends are also very important.

The oil market is presently characterized by an oversupply of oil and also by huge oil stocks throughout the world. It is the reason why a freeze of production would not have been up to the task. Producers have to cut their output in order to accelerate the rebalancing of the market and to begin reducing stocks.

AE: OPEC's output rose by 170,000 barrels a day to a record 33.75 million in September. The increase from the previous month was driven by the return of production from Libya and Nigeria. These countries including Iran are still trying to increase production by as much as 1.5 million bpd collectively. Do you think they will be exempted from the decision by November?

FP: There is an understanding within OPEC that Libya, Nigeria and Iran must benefit at this stage from a special status. It is obvious for Libya, whose production was divided by five between the end of 2010 and August 2016. As far as Nigeria is concerned its crude production fell over the past few months and it remains significantly below its capacity due to unrest in the Niger Delta. Iran is increasing its production and exports since the beginning of this year but they were greatly reduced between 2012 and 2015. It would not be possible to reach and to implement an agreement of this kind without some exemptions based on serious facts.

The key issue is Iran of course. Its crude production was 3.6-3.7 million b/d recently and this country wants to go back to at least 4 million b/d. Iran is clearly a special case but it must be reintegrated in OPEC production limitation mechanisms at a later stage. The conditions of this reintegration must be discussed now.

AE: Do you think the decision will be sustainable?

FP: There are three "ifs". There must be a formal agreement in Vienna at the end of November; non-OPEC countries must be part of the game; and these decisions must be implemented. If these three conditions are met, the impact on world oil prices could be significantly bullish as world oil demand is continuing to rise and non-OPEC production is being reduced. Almost all the basic trends would strengthen the hand of the producers. The last one is the very high level of world oil stocks and they must be reduced over a certain period of time.

Interview by Anita Fatunji