Oil prices lower after Iran douses hopes for production deal

Crude oil prices lost steam in early Asian trade Tuesday after Iran played down expectations for an oil-production deal, calling the oil producers meeting on Wednesday “consultative”, reinforcing views that major producers will walk away from the negotiations without a pact.

Iran’s comment, although not unexpected, doused much of the hope that members of the Organization of the Petroleum Exporting Countries and other heavyweight producers such as Russia, would clinch an agreement tomorrow to abate production in order to lift prices.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in November CLX6, -0.17%   traded at $45.86 a barrel, down $0.07 in the Globex electronic session. November Brent crude on London’s ICE Futures LCOX6, -0.34%   exchange fell $0.16 to $47.19 a barrel.

Since mid-2014, oil prices have grappled with the persistent issue of oversupply as big OPEC players such as Saudi Arabia have taken a “market-share first” strategy to defend their turf against the U.S. shale boom. The lower margins on account of the lower oil prices has led several oil producers to drop out or scale back their investments. In 2015, global investments in oil and gas fields fell by 25%, and is set to slide by a further 24% this year, according to Paris-based energy watchdog International Energy Agency.

nalysts say the longstanding political rivalry between Saudi Arabia and Iran remains a core hindrance to any potential deal at Algeria. “There is really no hope of any agreement when Iran and Saudi Arabia don’t agree,” said Alan Oster, chief economist at National Australia Bank.

Saudi Arabia has stated it would support a production freeze, only if all players are committed to the plan and if Iran caps its future production at its current daily output of 3.6 million barrels, according to people familiar with the kingdom’s proposal. However, Iran has reiterated its goal to keep pumping until output hits the presanction levels of 4.2 million barrels a day.

Even if a deal were reached, oversupply in global oil markets would persist as countries like Nigeria and Venezuela are aggressively ramping up production to make up for losses suffered by them in recent months due to internal strife.

“Freezing output at current levels would do little to balance the market given that the majority of OPEC members are producing at or around their peak capacity,” said BMI Research.

Moreover, any artificial effort to lift oil price prematurely will be counterproductive over the medium term, a risk that OPEC is keenly aware of, said Morgan Stanley, predicting an agreement to cut production may only come out of “severe budget stress or belief that long term supply has already overcorrected on capex cuts.”

Stronger-than-expected resilience by U.S. shale producers is adding to the bearishness. Although Nymex prices have failed to break above $50 since the end of June, U.S. oil drillers have been steadily returning to the oil patches. In the week ended September 16, the total active oil rigs in the U.S. rose to 418, based on data provided by industry group Baker Hughes.

Investors will be monitoring the weekly U.S. crude stock report due Wednesday for cues. A survey by S&P Global Platts shows U.S. crude inventories rose 3.2 million barrels last week while gasoline stocks remained unchanged.

Nymex reformulated gasoline blendstock for October RBZ6, -0.41%  — the benchmark gasoline contract — fell 29 points to $1.3995 a gallon, while October diesel traded at $1.4454, 36 points lower.

ICE gasoil for October changed hands at $423.00 a metric ton, down $2.75 from Monday’s settlement.

 

By Market Watch