No deal on oil production freeze

Oil prices opened sharply lower in Asian trade after major oil producers failed to agree on a deal to freeze output.

Saudi Arabia's minister of Oil and Mineral Resources Ali al-Naimi (C) arrives for the organization of Petroleum Exporting Countries (OPEC) meeting, in the Qatari capital Doha, on April 17, 2016. Top energy officials from some 15 countries including Saudi Arabia and Russia are at the Doha talks, amid reports a draft agreement was in the works to freeze output at January levels until at least October. / AFP PHOTO / KARIM JAAFAR

Oil prices opened sharply lower in early Asian trade after major oil producers ended their meeting in Doha, over the weekend without reaching an agreement to cap production.

Hopes for a deal among major producers, including several from the Organization of the Petroleum Exporting Countries and Russia, were a main driver in a rally that lifted US crude prices more than 50 per cent from their February lows. US crude settled at $US41.50 a barrel on Friday.

Now, much of those gains could be eroded in a market that has already endured a turbulent year, analysts say.

US crude plunged 6.7 per cent at $US37.70 a barrel and Brent was down 6.9 per cent at $US40.14 a barrel in early Asian trading.

“This is an extremely bearish scenario and we will probably see a knee-jerk reaction on the market,” said Abhishek Deshpande, oil analyst at Natixis. “Prices could touch $US30 a barrel within days.”

Steep falls in crude will also weigh on equity markets more generally. Stocks have often moved alongside oil this year. Bank shares, for instance, many of which have large energy portfolios, have been pressured by the declines in oil.

At the meeting in Doha, oil producers that supply nearly half of the world’s output failed to reach a deal to curb their production after Saudi Arabia appeared to walk away from any agreement that didn’t include geopolitical rival Iran.

Iran has ruled out capping its own production. It had only recently returned to international oil markets after sanctions were lifted in January, and the country wants to regain lost market share.

Mr Deshpande said that most of the recent rally was supported by the idea that some form of a deal could happen. The failed talks will “seriously hurt investor confidence,” he said.

Hedge funds and other money managers expanded their net-long position in U.S. crude—or bets that prices will rise—by 11 per cent in the week ended Tuesday, Commodity Futures Trading Commission data showed Friday. If investors now start unwinding these bullish positions, this could add pressure to prices, analysts said.

“You’re going to see an exit of long positions,” said Jason Schenker, president of Prestige Economics in Austin, Texas, adding that prices could revisit the 13-year lows reached in the first quarter. “The assumption that there was going to be an actual freeze on supply was over-estimated.”

Still, other market watchers said that prices are unlikely to fall back to those previous lows because US production is falling. Concerns about weaker demand in China may also be ebbing.

“You’ve got to be more confident in the market today than you were three months ago,” said David Zusman, chief investment officer at Talara Capital Management, which manages $US500 million. “I don’t think actions of OPEC will be required to balance this market anyhow. You’ve got a combination of improved demand as well as declining supplies.”

Steven Kopits, president of consulting firm Princeton Energy Advisors, added, “the view that the market will balance in the third quarter has gained some traction.”

Even those investors who had been sceptical that a deal would make a huge difference to production—not least because big producers would be freezing their crude output at current high levels—believed agreement in Doha would have sent a positive signal to the market

A deal would have indicated that producers were willing to tackle an oversupply that has pressured prices for almost two years now, they said.

The failure to agree to a freeze will now likely prolong the glut. Last year, the world was producing about 2 million barrels of oil a day more than there is demand for.

While US output has begun to slowly decline as shale drillers pare back amid the price rout, other producers have been pumping flat out. Saudi Arabia has kept producing above 10 million barrels a day since last year in a bid to gain market share.

Mr Deshpande estimated that the market will be oversupplied by over one million barrels a day this year.

“After the failed freeze, the market just can’t balance until early 2017,” he said. “That is very bearish for prices.”

The much-anticipated meeting of Organization of the Petroleum Exporting Countries members and other major oil producers, such as Russia, had started a day of negotiations over a possible freeze with what participants described as a draft deal.

But the meeting quickly turned to sniping and confusion after Saudi Arabia’s delegation appeared to step back from any agreement without geopolitical rival Iran.

Ahead of the meeting, delegates circulated a draft accord that calls for freezing output at January levels until October 1 to gauge its effect on prices. The freeze, first suggested in February, is intended to limit global supply and bolster prices.

The draft, reviewed by The Wall Street Journal, called for a monitoring committee comprising members of OPEC and other countries that would be charged with ensuring compliance.

Ryadh publicly signalled it won’t consider a freeze without Iran. Saudi Crown Prince Mohammed bin Salman, the country’s top economic official, repeated that view over the weekend, in an interview with Bloomberg News published on Saturday.

That tone contrasted with the kingdom’s delegation here, led by longtime Saudi Oil Minister Ali al-Naimi. He landed in Doha on Saturday and declined to comment ahead of the meeting. But people familiar with the Saudi delegation’s thinking said Riyadh was willing to sign a deal despite what they described as political statements from Prince Salman.

Later Sunday, Mr Naimi’s delegation changed its tune and insisted on Iranian participation after all, two delegates familiar with the matter said. The switch was “surprising and contradicts what they have been saying for the last few days,” according to one Persian Gulf oil official in Doha familiar with the new stance.

Going into the meeting the key sticking point had always been Iran. It is also uncertain whether any deal will be considered strong enough to convince energy markets that producers are serious about reining in production and bolstering prices.

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