Oil Climbs as Saudi Arabian Offer Opens Door to Future OPEC Deal

  • Saudis offer output cut to January level if Iran doesn’t boost
  • Maximum expected from Algiers talks is production freeze: UAE

Algeria's Boutarfa: Saudi Willing to Act on Oil Market

Oil advanced as Saudi Arabia’s offer to cut output opened the door to a future OPEC deal, though the kingdom doesn’t expect an agreement when members of the group meet this week.

Futures rose 3.3 percent in New York after slumping 4 percent on Friday. While Saudi Arabia and Iran didn’t reach an agreement after two days of preparatory talks in Vienna, the Saudis did offer to pump less crude if Iran caps output, according to two people familiar with the negotiations. The kingdom proposed to cut its production to January levels, Algerian Energy Minister Noureddine Boutarfa said Sunday.

"I think it’s positive that OPEC is getting together," Francisco Blanch, head of commodity markets strategy at Bank of America Merrill Lynch in New York, said in a Bloomberg television interview. "It’s in the Saudis’ interest and other OPEC members’ interest to start coming together and do something."

Oil has fluctuated since rallying in August on speculation major producers will agree on ways to stabilize the market when they meet in Algiers on Wednesday. Prices fell on Friday after a delegate of the Organization of Petroleum Exporting Countries said Saudi Arabia doesn’t expect a decision on output at the meeting. Three people with knowledge of the matter also said Russia’s delegation plans to join discussions only after OPEC reaches a consensus.

WTI, Brent

West Texas Intermediate for November delivery rose $1.45 to close at $45.93 a barrel on the New York Mercantile Exchange. Total volume traded was 11 percent below the 100-day average. Prices have averaged about $44.80 this quarter.

Brent for November settlement climbed $1.46, or 3.2 percent, to $47.35 a barrel on the London-based ICE Futures Europe exchange. The global benchmark closed at a $1.42 premium to WTI.

For a Gadfly commentary about Saudi Arabia’s stance, click here.

Saudi Arabia pumped a record 10.69 million barrels a day in August, up from 10.2 million in January, according to data compiled by Bloomberg. OPEC and other major producers need to reduce output by 1 million barrels a day to re-balance markets and stabilize prices, Algeria’s Boutarfa said last week.

"The OPEC ministers are using verbal intervention tactics to gauge the market," said Chris Kettenmann, chief energy strategist at Macro Risk Advisors in New York. "They’re in a tough predicament. Libya is ramping up, Iran is still ramping up, Nigerian supply disruptions are reduced and the U.S. rig count is up. It’s hard to see what good a Saudi cut would do."

Iranian Proposal

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Iran is said to have put a proposal “on the table” at recent meetings that it should have 12.7 percent of OPEC output, or more than 4 million barrels a day, Reza Zandi, a reporter with Seda, an Iranian weekly magazine, said in a Twitter post. Other countries would reduce their production to the lowest level in a year based on this formula, according to Seda.

The United Arab Emirates supports an oil-supply freeze if everyone participates, but output cuts are not up for discussion this week, Oil Minister Suhail Al Mazrouei said in Algiers. Venezuela’s Oil Minister Eulogio del Pino said in the Algerian capital that his country has a "lot of expectation" ahead of the gathering and that he hoped an agreement would be reached.

Russia hasn’t received offers from other producers regarding a possible output cut, according to Energy Minister Alexander Novak, who told the RIA Novosti news agency that failure to agree on a pact wouldn’t be critical for the nation.

Market Balance

"We are getting to a point where the market is going from a big surplus to a balance to a deficit," Blanch said. "The price war is behind us."

OPEC’s decision to abandon its long-standing strategy of supporting prices by cutting production has defined the market since November 2014. Members, led by Saudi Arabia, have boosted output almost 10 percent to 33.7 million barrels a day. That’s driven U.S. output down but also hammered oil exporters’ own economies as prices languish at half their level two years ago.

"The fact of the matter is that there’s still too much oil," Macro Risk’s Kettenmann said. "The market’s oversupplied and it will take a lot longer to return to balance."

Oil-market news:

  • Money managers increased their short position in WTI by 50,558 futures and options during the week ended Sept. 20, according to the Commodity Futures Trading Commission.
  • Hedge funds and other money managers cut their net long position on Brent by 47,071 contracts in the week ended Sept. 20, according to data from ICE Futures Europe.
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