Market Insider

Saudi Arabia, Iran pump at high levels as U.S. producers cut back

Commodities tomorrow: Crude build troubles traders
Commodities tomorrow: Crude build troubles traders

Saudi Arabia is pumping record amounts of oil, and Iran is resuming production faster than expected — a strong sign neither is likely to easily entertain the idea of an OPEC deal to control production.

OPEC this week said it would hold an informal meeting on the sidelines of an Algerian energy conference in late September, and some members — mostly Venezuela — have been pushing for talks on a new pricing mechanism. Chatter about a possible OPEC deal at that meeting sent oil prices higher this week, but they were in sharp retreat Wednesday on reports of higher U.S. oil stockpiles and on news that Saudi Arabia's production rose to a record 10.67 million barrels a day in July.

"I'm skeptical that we're going to see anything out of OPEC. I don't see anything out of Saudi. Their silence is rather telling," said Greg Priddy, director of global energy with Eurasia Group.

Saudi Arabia, the largest OPEC exporter, would have to be part of any plan to change the OPEC strategy of letting the market set prices. That strategy, master-minded by Saudi, was adopted by the Organization of the Petroleum Exporting Countries in November 2014. The policy preceded another big downdraft in prices.

Some analysts say OPEC is trying to boost prices with its talk of a meeting, and RBC analysts believe oil had been oversold and may have found a new bottom, thanks to that chatter. West Texas Intermediate crude futures dipped into bear market territory briefly last week when they fell below $40 a barrel, viewed as a key psychological level.

Saudi Arabia and Iran were at the center of disagreement that scuttled a previous OPEC effort to freeze production last April, and both are seen as key to any future deal. Saudi Arabia has said it will not agree to any limitations on production unless all producers agree. Iran, meanwhile, had refused to be limited in any way, as it was in the process of returning barrels to the market after sanctions against it were lifted.

Iranian Oil Minister Bijan Namdar Zanganeh was quoted Wednesday by Fars as saying Iran's oil production was at 3.85 million barrels a day, according to wire reports. The U.S. Energy Information Administration had estimated that Iran would not be back to that level until 2017.

Meanwhile, Venezuela President Nicolas Maduro said he spoke to Saudi Arabia's king about boosting oil prices and is reaching out to the heads of state of other producing nations about boosting oil prices.

"He just came across as very desperate," said Priddy. Venezuela has been in disarray politically and economically, and its oil production has suffered as a result. Low prices have given it no ability to maintain or improve its oil infrastructure. Maduro said OPEC should try to return oil prices to the $70 per barrel level, according to wire reports.

"If you look at the amount of short interest in WTI and Brent, these flurries of speculation from OPEC, coming from the weaker members, tend to be when you see a run up in short interest," Priddy said. "It's kind of opportune of them to start a short covering rally. I think in the next couple of months, we're going to see repeated attempts to keep some of this chatter alive."

Priddy said he believes the market is very close to rebalancing. A global supply glut flooded the world with upwards of 1.5 million extra barrels a day earlier this year.

OPEC, in its August report Wednesday, forecast demand growth of 1.22 million barrels a day year on year, which was 30,000 barrels higher than forecast in July.

Analysts say oil could remain under pressure as U.S. refineries undergo seasonal maintenance this fall. Refiners typically reduce their need for crude oil between late August and October, as they switch over to produce winter blends.

The U.S. is also working its way through a gasoline glut that had pressured crude prices. On Wednesday, the EIA reported that there was a drawdown of about 2.8 million barrels in domestic gasoline but a build of 1.1 million barrels in U.S. crude production. Citigroup analysts said production data from both the U.S. and OPEC on Wednesday signals that OPEC is winning its market share battle against U.S. shale producers and questions the rationale behind any kind of freeze by the cartel.

U.S. oil production held steady at 8.4 million barrels a day last week, about a million barrels a day less than year-ago levels, according to EIA data Wednesday. The U.S. and Mexico have been among the biggest contributors to cutbacks that have led to the rebalancing of the world oil market, while OPEC and Russia continued to pump. There are also outages in Nigeria and Libya that have kept oil off the market but either of those countries could restore production at some point, adding barrels to the market.

Analysts mostly expect oil to head higher after the end of U.S. refining maintenance. But they disagree on how much oil could drop in the interim. WTI futures closed at $41.71 per barrel Wednesday, down 2.5 percent.

"There's some key technical numbers right around $35, and I think that's what we're going to consider before we can have a more constructive outlook," said John Kilduff, partner with Again Capital. He said the trough could come right around the time of the energy conference where OPEC plans to meet — Sept. 26-28.

"Prices will be low again, likely below $40, and the glut is going to be apparent to everyone. … I think they're going to be hysterical going into the OPEC meeting. They're going to have to do something," he said.

There has been speculation that OPEC would discuss, or perhaps launch a study of, returning to production bands if oil really does tank. Those bands dictate a range of production for each nation and move the production quota with the price of oil.

He said OPEC may not be able to just talk up the price as it has before. "I think they've gone to the well one time too many. They need to do something that will give them cover so they can cheat," he said. He explained that with a production band, there's a fixed quota, and different prices would mean different levels of production.

"I think everyone who loved to cheat loved the collective ceiling," said Helima Croft, RBC global head of commodity strategy. "This is where the accountability becomes much more of an issue. How do you give Iraq an individual quota when they've been out of the market for so long. The band idea gives enough latitude to say you can produce between X and X, and that might be a way to bring everyone together."

Kilduff said he would expect OPEC to continue as they are, even if they did agree to a band. "They weren't very good at it last time. They were like dieters around a dessert table," he said.