Talk of Saudi-Russian Oil Deal Boosts Prices
News Article by Hamm's Oilfield Goods
Oil prices climbed Wednesday amid speculation that Russia and Saudi Arabia may soon cooperate to rein in the torrent of oil flowing to oversupplied nations in a bid to lift prices out of the worst slump in decades.
Speculation about an arrangement between the world’s two biggest oil exporters began last week and has, against all odds, distracted global oil markets from a pair of large weekly increases in U.S. crude stockpiles, which usually send prices much lower.
Still, chances of a deal are slim, for many reasons.
Even as oil prices sank, Saudi Arabia and its allies with the Organization of the Petroleum Exporting Countries kept pumping crude all out and have even increased production in the 14 months since international cartel decided not to stem its output to support prices. It was an effort to carve out a bigger corner of the global market and gave Saudi Arabia an edge in its ongoing geopolitical rivalry with Russia and Iran, which have been slammed by cheap crude.
Besides, not every OPEC member may be willing to cut production. Iran plans to put 500,000 barrels a day into the market this year after the lifting of Western sanctions this month and has said it wouldn’t cut production until its output reached pre-sanction levels.
And though OPEC leadership has signaled the group would cut production if other producers pull back as well, it has also reasoned that lower oil prices could restore a natural rationality to the market by forcing out higher-cost producers including U.S. shale drillers and Canadian oil sands producers. OPEC has said it doesn’t believe it should have to sacrifice its low-cost oil production in the Middle East and elsewhere just to subsidize rivals that produce oil at higher cost.
Despite slim chances of an agreement, chatter about Russia-Saudi concessions has arisen several times and last stirred oil markets during the run up to OPEC‘s semiannual meeting in December, but no deal emerged then and crude prices crashed afterward.
Earlier this week, traders pushed up oil prices after a top official at Russia’s Lukoil signaled it could cut production alongside OPEC if it had guidance from political leaders. On Wednesday, Russia‘s energy ministry said its top official met with Russian oil industry officials to discuss possible cuts with OPEC “due to unfavorable pricing conditions in the world oil market.”
On the other side of the table, OPEC Secretary-General Abdullah al-Badri said in a speech in London this week that the world’s oil exporters should cut production together before a crisis in oil supplies unfolds in coming years, repeating OPEC’s offer to curb production as long as someone else does it, too.
“What’s strikingly different this time is the rumors are persisting,” Hittle said. “It’s not going away.”
If Russia and OPEC each cut daily production by about 1 million barrels, the global oversupply would quickly evaporate and crude prices would rise sharply on falling oil inventories. Though chances of an agreement are still small, the rumors have lasted longer and raised oil prices higher than usual.
U.S. crude settled up 85 cents at $32.30 a barrel on the New York Mercantile Exchange, up 6.4 percent from the settlement on Monday. Global benchmark Brent rose $1.30 to $33.10 a barrel on the ICE Futures Europe.
Another development Wednesday was the oil market’s sudden divorce from the broader U.S. stock market as the Dow Jones industrial average and the S&P 500 Index fell sharply after a report by the Federal Reserve expressed unease with the global economy.
The split between Wall Street and the oil markets isn’t as remarkable as their previous connection, though. High oil prices are generally bad for global growth because they weigh on consumer spending. But for weeks, stock prices and oil prices had glided along the same paths as oil became a barometer for the world’s economic health.
“The economy has had as much of a boost as it can get at $40 a barrel. It probably doesn’t get much incremental benefit from going down to $30 a barrel,” said Chris Ross, a finance professor at the University of Houston. “We got to a level that it was ricocheting into the banking industry.”