Lots of words, but no OPEC action even as oil soars

Saudi Arabia, OPEC’s most important member, may propose an eventual group production cut of 1 million barrels a day that may take effect in 2016, Energy Intelligence reported Thursday, citing a group delegate it didn’t identify. “There were reports that the Saudis would agree to a cut but they were quickly denied”.

Analysts say the Saudi approach has definitely changed – though a reduction will depend on the stance of several other major oil producers.

Ed Cowart, of Eagle Asset Management, points out that uncertainty over global supply was the “justification for $100-per-barrel oil a couple of years ago”.

Light, sweet crude for January delivery recently rose 52 cents, or 1.3%, to $40.46 a barrel on the New York Mercantile Exchange.

A Saudi source said later the report was “baseless” but declined further comment and a source at Energy Intelligence said it stood by its story.

Saudi Arabia has been the main driver of OPEC’s current policies to pump record volumes of crude to push higher cost producers, such as newcomers tapping into USA shale, out of the market, so if a proposal to cut output was confirmed it would suggest a change in a approach.

One challenge facing the Organization of Petroleum Exporting Countries as ministers gather in Vienna for their bi-annual meeting is lack of agreement over how to manage supply and stabilize the oil market.

“They are offering their crude oil at a lower price to the two most important markets, the US and Asia, two days before the Opec meeting”, a clear sign the Saudis aren’t going to pull back output, said Bob Yawger, director of the futures division at Mizuho Securities USA Inc in NY. It dropped $1.91 to $39.94 on Wednesday, the lowest close since August 26.

“Our base case scenario still anticipates an increase in total OPEC production to 32 million barrels per day next year as sanctions on Iran are lifted”, said Tim Evans, a Citi Futures analyst. The U.S. benchmark crude traded at a $2.89 discount to Brent.

Venezuela and Ecuador are calling for OPEC to cut output after their economies have been devastated by the tumbling price. Instead, the group has increased its output in recent months and now produces above its target of 30 million barrels a day. Russian Energy Minister Alexander Novak recently described Saudi Arabia’s presence in Eastern Europe as Russia’s “toughest competition”.

“The chance that the oil price crashes to very low levels in Q1-16 increases, potentially and eventually driving all parties to the table to act and bring the oil price away from catastrophic US$20-30/b levels”, Schieldrop said. USA crude was trading 76 cents higher at US$40.70 a barrel, after sinking below US$40 on Wednesday.

Iran is also among the cartel’s members who would like to see prices rise, but it insists that it can not possibly throttle its own oil wells as economic sanctions against Tehran are set to be lifted soon.