OPEC deal shows Saudi oil strategy has backfired, says John Kilduff

Kilduff: Oil market is oversupplied, needs the cut

The concessions offered by Saudi Arabia in its bid to lock down a deal to limit the globe's oil supply show the world's largest crude exporter is getting pinched by its own policy, Again Capital founding partner John Kilduff said Wednesday.

Sources told Reuters that OPEC hammered out a deal on Wednesday to reduce the cartel's production to 32.5 million barrels per day from around 33.24 million, with output levels for each member to be determined in November.

The Saudis decided in November 2014 to allow an oversupplied oil market to balance on its own, rather than coordinating an oil output cut among OPEC members. The policy was designed to reduce supply by washing out high-cost producers — such as U.S. shale drillers — but the strategy has also piled pressure on Riyadh.

Saudi Arabia's foreign exchange reserves have fallen 20 percent over the last two years, to $587 billion through March, the last month for which IMF data were available. On Monday, the kingdom said it would cut ministers' pay by 20 percent and pare perks for public sector employees, who make up two-thirds of the country's workforce, Reuters reported.

The move to squeeze public employees came ahead of an informal gathering of OPEC members and other producers at a previously scheduled meeting in Algeria to discuss a plan to stabilize oil prices, which remain nearly 60 percent below their 2014 peak.

Saudi Arabia's Energy Minister Khalid al-Falih arrives for an informal meeting between members of the Organization of Petroleum Exporting Countries, OPEC, in the Algerian capital Algiers, on September 28, 2016.
Ryad Kramdi | AFP | Getty Images

"The big takeaway is how into a corner the Saudis have backed themselves. This whole plan has backfired on them. They're going to be bearing most of the cutback if they pull it off, and they've had to really kowtow to the Iranians in this whole thing," Kilduff told CNBC's "Power Lunch."

In April, OPEC members and Russia met in Doha, Qatar, to hammer out a deal to freeze production at January levels. But Saudi Arabia scuttled that plan when its regional rival, Iran, refused to participate.

Ahead of the meeting in Agiers, Saudi Arabia softened its stance, reportedly offering to cut its own production if Iran agreed to freeze its current output at roughly 3.6 million barrels a day.

On Tuesday, the kingdom became even more accommodating. Saudi Energy Minister Khalid al-Falih said Iran, along with Libya and Nigeria, could be allowed to pump "at maximum levels that make sense," even as other producers limited production, Reuters reported.

It was not immediately clear whether those terms would be agreed to in November. Iran's oil output has reached 3.6 million barrels per day after the lifting of international sanctions earlier this year, but Tehran says it is targeting production of 4 million barrels a day.

Nigeria and Libya are both seeking to increase production as they make progress resolving domestic conflicts that have sidelined crude supply.

On Tuesday, Mustafa Sanalla, the head of Libya's state-run National Oil Corp., said the country's crude production had more than doubled to 485,000 barrels a day after the reopening of oil ports this month, Dow Jones reported.

Those gains, along with Russian plans to increase production, show the market will continue to be swamped with supply, Kilduff said.

Michael Cohen, head of energy commodities research at Barclays, said Wednesday he believes the situations in Nigeria and Libya are getting worse on balance. He told "Squawk on the Street" he doesn't expect developments in those countries to provide anything more than "fits and starts" for the oil market in the next year.