Oil Output Deal `Brilliant Communications Strategy,' JBC Says

Oil Falls as Iran Rejects Freeze
  • Potential for joint production cut `little to do with reality'
  • OPEC strategy to maintain output, defend market share working

Saudi Arabia’s agreement with Russia to cap oil production was a “brilliant communications strategy” which has supported prices, but it will probably remain just that, according to consultant JBC Energy GmbH.

“The market is seeing some support coming in from OPEC and non-OPEC freezing output,” Johannes Benigni, managing director of JBC Energy, said in an interview in Singapore on Tuesday. “This has little to do with reality and I don’t believe for a moment that anyone is going to cut.”

Oil has rebounded from a 12-year low in January as Saudi Arabia, Russia, Qatar and Venezuela forged a producer accord last month to freeze output, raising speculation that the Organization of Petroleum Exporting Countries and non-members of the group may even agree to pump less to curb the global oversupply. Goldman Sachs Group Inc. says “green shoots” are emerging while the International Energy Agency sees “light at the end of the tunnel” for prices that have declined for three years.

“I don’t think it’s reasonable to assume that Saudi Arabia and Russia will agree on the joint cut,” said Benigni. “It was, first and foremost, a brilliant communications strategy from the Saudis and I don’t see the trust to be in place between Saudi Arabia and Russia that could be the basis for a production cut down the line,” he said.

Producers’ Meeting

Major producers will probably gather next month to discuss a proposal to cap production at January levels as part of efforts to stabilize the market, Russian Energy Minister Alexander Novak said Monday after meeting with his Iranian counterpart. Iran is key to the success of any output agreement and the Persian Gulf nation has said it plans to increase output by about 1 million barrels a day over the next year.

Iran, the second-largest OPEC producer before sanctions intensified in 2012, is seeking to win back its share of the oil market after economic penalties were lifted in January. The Persian Gulf nation has “reasonable arguments” not to be constrained by the freeze for now, according to Novak. It will take “another year or two” for Iran to reach pre-sanction output levels, said Benigni.

Brent for May settlement, down 35 cents at $39.18 a barrel on the London-based ICE Futures Europe exchange at 1:54 p.m. Singapore time, has risen 5.1 percent this year amid falling output from Kurdistan, Nigeria and the U.S., said Benigni. Prices may climb to $50 a barrel in the next three to four months as the market rebalances on higher seasonal demand and shrinking supplies, he said.

OPEC’s strategy to maintain output amid a global oversupply in order to defend market share and drive out higher-cost producers is working, according to Benigni.  Non-OPEC supply already is down “significantly,” he said.

“First you have to kill some of the expensive producers,” said Benigni. “I don’t see that the production cut would support the strategy to eliminate some of the high-cost producers. It doesn’t make sense. You don’t give them hope, you don’t give them a support line, you don’t give them anything that allows them to survive.”

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