Crude prices rise against ‘unlikely scenario’ of coordinated output cuts

Crude oil prices eked out minor gains on Asian trade Friday as the market adopts a cautious attitude considering the possibility that large oil producers may discuss a coordinated output cut to salvage prices.

Oil prices rose sharply overnight after Russia’s energy minister was reported by Russian news agencies as saying the world’s major oil-producing countries could meet in February to discuss a possible 5% cut in output. But the gains quickly faded after a senior official from the Organization of the Petroleum Exporting Countries refuted the claim of an emergency meeting or a possible cut.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in March CLH6, +2.44% traded at $33.91 a barrel, up $0.59, or 1.8%, in the Globex electronic session. March Brent crude LCOH6, +2.54% on London’s ICE Futures exchange rose $0.68, or 2%, to $34.57 a barrel.

Prices stayed largely stagnant on the news that the Bank of Japan unexpectedly introduced negative interest rates for the first time to stimulate inflation.

“The move will likely have minimal impact on oil prices because the physical market is oversaturated at the moment,” said Roman Kazmin, the head of LNG Asia at ICIS.

If more central banks around the world adopt similar approaches, the U.S. dollar will strengthen further, said Alex Poon, a vice president at Admis Limited, a futures brokerage firm in Hong Kong. As oil prices are denominated in dollars, a strong greenback means more expensive oil for traders holding foreign currencies. The dollar BUXX, +0.36% soared on the BOJ news.

Persistent oversupply squeezed prices to below $30 a barrel earlier this month and analysts say they will fall further without a significant reduction in supply or a drastic surge in demand.

As the leading oil cartel, OPEC has traditionally regulated its output to support prices. However, in the past two years, the group has reversed that tactic by letting production run freely to defend their market share in the face of stiffer competition from Russia, the U.S. and other non-OPEC players.

“The oil market is now reacting on a psychological level, rather than a fundamental one,” said Li Li, a research director with ICIS China.

The fact that prices in Asia still rose moderately after Saudi Arabia shot down the idea of a possible cut shows the market hasn’t completely given up hope for concerted effort to prop up prices, she added.

However, doubts of a collective cut run deep in the market with most analysts saying the chance of an agreement among the major producers is “extremely low,” ANZ Research said.

“Despite the unlikely scenario of supply cutbacks in the oil market, prices have found some support above $30 a barrel. We believe this basis is fragile, with fundamentals expected to weaken in the coming weeks,” the bank said.

Some market observers said that given low production costs for big Middle Eastern oil producers, cash-flush producers with robust foreign reserves like Saudi Arabia can weather lower oil prices for much longer.

For that reason, many are looking toward non-OPEC producers such as the U.S., Brazil and China to scale back production to offset the supply overhang.

“The worry is after Iran clears inventories and starts pumping out fresh oil, the world will be even more flooded with supply. Prices could fall to between $25 [and] $35 a barrel in the next six months,” one bank’s Australia-based oil analyst said.

MarketWatch