Crude oil prices erased their gains made after the deal to freeze output was struck as Saudi Arabia’s oil minister yesterday ruled out cutting production anytime soon. Saudi Oil Minister Ali Al-Naimi, who was speaking at a conference in Houston, Texas, said on Tuesday that a production cut is “not going to happen” because he was sceptical about other countries enforcing it even if such a decision was taken.
On February 16, OPEC members Saudi Arabia, Venezuela and Qatar reached a deal with Russia, a non-OPEC member, to freeze production at January levels. This triggered a rally in oil prices and other commodities, as well as in global equities. However, the rally failed to lift prices beyond $34 a barrel for US light crude and $36 a barrel for Brent crude as doubts remain about other OPEC members following suit.
OPEC members such as Iraq and Kuwait have said they will support the deal but Iran, while in principle supports the deal, is strongly opposed to any freeze itself. Iran’s Oil Minister Bijan Namdar Zanganeh was quoted on Tuesday describing the deal as “ridiculous”, fuelling yesterday’s oil sell-off to a 4% slump in prices.
Iran has only just returned to the international market after years of sanctions and freezing output at January levels would mean capping exports at around 1 million barrels a day. The country is keen to regain market share following the lifting of sanctions in January and is unlikely to agree to any deal that doesn’t make allowances for Iran’s position. It has already increased exports by 500,000 bpd since January and is hoping to increase them by another 500,000 bpd this year.
Many analysts expect for Iran to gain market share at the expense of US shale producers who are being priced out of the market as a result of the higher cost of shale production. Investment by US energy firms has fallen drastically and the number of active oil rigs fell to the lowest since 1999 last week. Other countries also suffering from the cheap oil, but mainly due to decreased revenue for the government rather than cost of producing it, include Russia, Venezuela and Nigeria.
The Russian rouble fell by 25% against the US dollar in 2015 as oil is the country’s biggest income earner. It is down a further 4.5% so far this year. Other major oil-linked currencies have also been tracking oil lower. The Canadian dollar fell by 19% last year, while the Mexican peso is down 6% already in 2016.
All eyes will now be on what next steps OPEC members and Russia agree on to implement the deal. A meeting between OPEC and non-OPEC countries is planned for mid-March. Venezuela, which has been actively lobbying for a deal, has said that over 10 major producers are likely to join the proposal to freeze output. Saudi Arabia, the world’s biggest producer, is insisting that an output freeze is needed as an initial process given that an agreement on a cut is unlikely to be reached.
The unwillingness to cut output left the markets disappointed and prices initially fell after the deal before staging a rally. However, the significance of Russia, the world’s second biggest producer, agreeing to cooperate with OPEC should not be downplayed and is probably a sign that the oil price crash is starting to bite.
WTI crude futures were last trading 3.1% lower today at $30.87 a barrel as traders remain cautious about the short term impact on the supply glut of last week’s agreement. Brent crude, which has regained its premium over WTI after briefly dropping below it in December/January, was last down 1.9% at $32.62.
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