Oil price gave up early gains Tuesday to trade lower as talk by top producers Saudi Arabia and Russia about freezing production was seen as too weak to turn the market around.
In a bid to stabilise the oversupplied market, both exporters said they would keep output at last month’s level going forward, but only so long as other major producers followed suit.
In the late European afternoon, Brent North Sea crude was 78 cents down at $32.61, its session low, having gradually slipped from its $35.55 high seen just before the announcement.
US benchmark West Texas Intermediate for March delivery was down 51 cents from Monday’s closing level at $28.93.
“The news has actually disappointed the market slightly because some people had hoped to see a cut rather than a production freeze,” City Index analyst Fawad Razaqzada told AFP. This prompted a “lukewarm response” from the oil market, analysts at Capital Economics noted.
“For the deal to have any teeth, Saudi Arabia in particular needs to be willing to cut output, not least to offset the increased supply still to come from Iran,” they said.
Iran, which has been pumping oil at maximum levels since a deal with Western powers ending sanctions, said in response to the freeze announcement that “there is room for discussion” but Oil Minister Bijan Zanganeh added that Iran “won’t relinquish” its market share.
Producers already at capacity
The Saudi and Russian oil ministers, along with their Venezuelan and Qatari counterparts, “agreed to freeze the production at (the) January level provided that other major producers follow suit,” said Qatar’s Energy Minister Mohammed bin Saleh al-Sada earlier. “This step is meant to stabilise the market,” said Sada, who is acting president of the OPEC oil cartel, describing the meeting in Doha as “successful”.
But analysts pointed out that, with the possible exception of Saudi Arabia, the parties to the agreement are already pumping at capacity, making a “freeze” somewhat pointless. “This freeze in no way changes market fundamentals because none of the four countries had been expected to increase production significantly anymore,” energy expert and university Professor Emeritus Jean-Marie Chevalier told AFP in Paris.
‘Beginning of a process’
But some analysts said something substantial may yet come from the initiative, pointing to Saudi Oil Minister Ali al-Naimi saying “this is the beginning of a process which we will assess in the next few months and decide whether we need other steps to stabilise… the market.”
Francis Perrin, President of the Paris-based think tank Energy Strategies and Policies told AFP that the hope is “…this creates a movement to which other countries, OPEC members or not, will also want to contribute.”
The 13-nation OPEC oil cartel, of which Saudi Arabia, Venezuela, Qatar and Iran are members, has refrained from cutting output as it looks to maintain market share in the face of competition from US shale oil producers.
Russia — which is not an OPEC member — has seen its recession-hit economy damaged further by the slump in oil price.
Natixis analyst Abhishek Deshpande told AFP that the exact January date was vital to Tuesday’s deal. “January 11, the date prior to Iran’s sanctions being lifted, is quite critical,” Deshpande said.
“Indeed freezing output at those levels could help balance the markets as early as third quarter of this year. “But this is based on an assumption of no increase in output from Iran and Iraq.”
-AFP
