Done deal: Saudi, Russia agree to oil output freeze, but…

…Prices slip because absentee Iran may still hike production, diluting any potential price impact

In what could become the first oil deal in 15 years between Opec and non-Opec producers, major oil exporters Saudi Arabia and Russia have agreed to keep production levels constant at January levels in a bid to put a floor under the rapidly sinking global oil price.

However, the price of oil, which spiked up by more than 5 per cent in early trade today on the hopes of just such a deal, slipped into negative territory 30 minutes into the announcement of the deal.

That’s because any deal between Saudi and Russia is contingent on other producers joining in. Even as Iraq has given out feelers that it may be willing to a production freeze, investors are concerned that Iran, which was missing from the crucial meeting, may still go ahead and ramp up production, diluting any potential impact on prices in a supply-led glut in the market.

The Saudi, Russian, Qatari and Venezuelan oil ministers announced the proposal after a meeting in Doha.

Saudi Oil Minister Ali al-Naimi said freezing production at January levels – near record highs – was an adequate measure and he hoped other producers would adopt the plan.

Venezuelan Oil Minister Eulogio Del Pino said more talks would take place with Iran and Iraq tomorrow (Wednesday) in Tehran.

“The reason we agreed to a potential freeze of production is simple: it is the beginning of a process which we will assess in the next few months and decide if we need other steps to stabilise and improve the market,” Naimi told reporters.

“We don’t want significant gyrations in prices, we don’t want reduction in supply, we want to meet demand, we want a stable oil price. We have to take [one] step at a time,” he said.

Earlier, oil prices spiked up more than 5 per cent in early trade on Tuesday as the market seemed to believe that prospects of a production-cut or at least a freeze were more likely now than at any other time this year.

US crude, or West Texas Intermediate (WTI) was down $0.39 or 1.32 per cent at $29.05 by 7.30pm UAE time, down $1.89 from the $30.94 that it hit earlier in the morning.

Brent crude for April delivery was down $0.32 (or less than 1 per cent) at $33.07 a barrel. It had earlier surged to $34.72 in the morning, the highest level since February 5, after rising 11 per cent on Friday.

Analysts still remain doubtful if some of the other major oil producers, most notably Iran, will agree to a production freeze.

“As much as we continue to believe that this is yet another meeting that would yield nothing, the markets remain wary of any sudden agreement that major oil producers could come to,” said Daniel Ang, an analyst at Phillip Futures in Singapore.

Oil has dropped over the past year due to booming US supplies and Opec’s decision, led by the group’s biggest producer Saudi Arabia, to ramp up exports and drive higher-cost producers out of the market.

Still, US crude prices may come under pressure as oil inventories remain close to record levels and US refiners are cutting back their processing runs on falling profit margins, which could lead to more oil going into storage.

WTI may fall to below $20 a barrel as a drop in US crude demand outweighs cutbacks in production as domestic producers shut wells, BMI Research said in a note.

“An inflection point is being reached, whereby the decline in US crude demand may outstrip the pullback in production,” BMI said. “Under this scenario, storage capacity in the US would be breached and WTI prices would collapse to below USD20.0/bbl.”

Opec-member Iran has pledged to steeply increase output in the coming months as it looks to regain market share lost after years of international sanctions, which were lifted in January following a deal with world powers over its nuclear program.

“Our situation is totally different to those countries that have been producing at high levels for the past few years,” a senior source familiar with Iran's thinking told Reuters.

Iranian Oil Minister Bijan Zanganeh also indicated Tehran would not agree to freezing its output at January levels, saying the country would not give up its appropriate share of the global oil market.

Additionally, with productions at record levels in January, a freeze at these levels will not necessarily result in bridging the demand-supply gap. “Even if they do freeze production at January levels, you have still got global inventory builds which are going to weigh on prices. So whilst it’s a positive step, I don’t think it will have a huge impact on supply/demand balances, simply because we were oversupplied in January anyway,” said Energy Aspects’ analyst Dominic Haywood.

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