Saudis and Russia agree oil output freeze, Iran still an obstacle

DOHA - Top oil exporters Russia and Saudi Arabia agreed on Tuesday to freeze output levels but said the deal was contingent on other producers joining in - a major sticking point with Iran absent from the talks and determined to raise production.

The Saudi, Russian, Qatari and Venezuelan oil ministers announced the proposal after a previously undisclosed meeting in Doha. It could become the first joint OPEC and non-OPEC deal in 15 years, aimed at tackling a growing oversupply of crude and helping prices recover from their lowest in over a decade.

Saudi Oil Minister Ali al-Naimi said freezing production at January levels - near record highs - was an adequate measure and he hoped other producers would adopt the plan. Venezuelan Oil Minister Eulogio Del Pino said more talks would take place with Iran and Iraq on Wednesday in Tehran.

"The reason we agreed to a potential freeze of production is simple: it is the beginning of a process which we will assess in the next few months and decide if we need other steps to stabilise and improve the market," Naimi told reporters.

"We don't want significant gyrations in prices, we don't want reduction in supply, we want to meet demand, we want a stable oil price. We have to take a step at a time," he said.

Oil prices LCOc1 jumped to $35.55 per barrel after the news about the secret meeting but later pared gains to trade near $33 on concerns that Iran may reject the deal and that even if Tehran agreed it would not help ease the growing global glut. [O/R]

OPEC member Iran, Saudi Arabia's regional arch rival, has pledged to steeply increase output in the coming months as it looks to regain market share lost after years of international sanctions, which were lifted in January following a deal with world powers over its nuclear programme.

"Our situation is totally different to those countries that have been producing at high levels for the past few years," a senior source familiar with Iran's thinking told Reuters.

Iranian Oil Minister Bijan Zanganeh also indicated Tehran would not agree to freezing its output at January levels, saying the country would not give up its appropriate share of the global oil market.

SPECIAL TERMS

The fact that output from OPEC kingpin Saudi Arabia and non-OPEC Russia - the world's two top producers and exporters - is near record highs complicates any agreement since Iran is producing at least 1 million barrels per day below its capacity and pre-sanctions levels.

However, two non-Iranian sources close to OPEC discussions told Reuters that Iran may be offered special terms as part of the output freeze deal. "Iran is returning to the market and needs to be given a special chance but it also needs to make some calculations," said one source.

Russian Deputy Prime Minister Arkady Dvorkovich said freezing output was not a problem for his country as he anyway expected its production to be flat this year versus 2015.

An Iraqi oil ministry source said Baghdad was also happy to freeze production if all parties agreed.

"The agreement (if successful) should support oil prices but there are reasons to be cautious. Not all OPEC members have signed up to the deal - notably Iran and Iraq. History would also suggest that compliance may be an issue," said Capital Economics' analyst Jason Tuvey.

OPEC has been quarrelling for decades over output levels and Russia, which last agreed to cooperate with OPEC back in 2001, never followed through on its pledge and raised exports instead.

Also complicating any potential agreement is the geo-political rivalry in the Middle East between Sunni Muslim power Saudi Arabia and Shi'ite Iran. Saudi Arabia and its Gulf allies are fighting proxy conflicts with Russia and Iran in the region, including in Syria and Yemen.

In Syria's five-year-old civil war, Riyadh politically and financially backs some rebel groups battling President Bashar al-Assad's government, which has gained the upper hand with the help of Russian warplanes and Iranian-backed Shi'ite militias.

RUSSIAN BUDGET

The Doha meeting came after more than 18 months of declining oil prices, knocking crude below $30 a barrel for the first time in over a decade from as high as $115 a barrel in mid-2014.

The slump was triggered by booming U.S. shale oil output and a decision by Saudi Arabia and its OPEC Gulf allies to raise production to fight for market share and drive higher-cost production out of the market.

But although U.S. output has begun to decline and global demand has been robust it has still not been enough to offset booming global production which has led to oil stockpiles rising to record levels.

Saudi Arabia has long insisted it would reduce supply only if other OPEC and non-OPEC members agreed, but Russia - the world's biggest oil producer and No.2 exporter - has said it would not join in as its Siberian fields were different from those of OPEC.

The mood began to change in January as oil prices fell below $30 per barrel.

While Venezuela has been the hardest-hit producer, current oil prices are a fraction of what Russia needs to balance its budget as it heads towards parliamentary elections this year. Saudi finances are also suffering badly, running a $98 billion budget deficit last year, which it seeks to trim this year.

But while talking about potential cooperation with OPEC, Russia raised its output to a new record high in January. For a table on OPEC and Russian output, click here

"Even if they do freeze production at January levels, you have still got global inventory builds which are going to weigh on prices. So whilst it's a positive step, I don't think it will have a huge impact on supply/demand balances, simply because we were oversupplied in January anyway," said Energy Aspects' analyst Dominic Haywood.

source: www.abs-cbnnews.com

Oil slides to lowest since 2003 after Iran sanctions lifted

LONDON/SINGAPORE - Oil prices hit their lowest since 2003 on Monday, as the market braced for additional Iranian exports after the lifting of sanctions against the country over the weekend.

The United States and European Union on Saturday revoked sanctions that had cut Iran's oil exports by about 2 million barrels per day (bpd) since their pre-sanctions 2011 peak to little more than 1 million bpd.

Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), said on Sunday that it is ready to increase exports by 500,000 bpd.

Worries about Iran's return to an already oversupplied oil market drove down Brent crude LCOc1 to $27.67 a barrel early on Monday, its lowest since 2003. The benchmark was at $28.59 by 0921 GMT, down 38 cents from its settlement on Friday.

U.S. crude CLc1 was down 38 cents at $29.04 a barrel, not far from a 2003 low of $28.36 hit earlier in the session.

"Iranian exports come at a very bad time," Barclays analysts said.

HSBC Chief Executive Stuart Gulliver, meanwhile, said the price of oil is likely to settle between $25 and $40 in a year's time.

"Major producers are currently delivering 2-2.5 million bpd more than demand, so the question is how long they can continue to overproduce at that level." he said at the Asia Financial Forum in Hong Kong on Monday.

While some analysts see an initial increase of 500,000 bpd or more in Iranian exports as easy to achieve, further production increases are considered a challenging.

"Iran needs significant foreign investment and technology to repair and build out its production potential," Morgan Stanley said. But the bank believes that Iran is capable of adding 600,000 bpd to the market initially.

Iran has at least a dozen Very Large Crude Carrier super-tankers filled and in place to sell into the market, and traders are betting that oil prices will drop again.

Data shows that short positions in U.S. crude markets, which would profit from further price falls, have hit a record high.

Since the market is strongly one dimensional with net shorts at an all-time high it could face further downside potential in the short term, Energy Aspects analyst Virendra Chauhan said.

The lifting of sanctions will unlock more than $100 billion in Iranian frozen funds, permitting Iran to finance imports.

Iranian President Hassan Rouhani plans to visit Italy and France next week on his first European trip since sanctions were lifted, a diplomatic source said on Monday.

"The legs of Iran’s economy are now free of the chains of sanctions and it’s time to build and grow,” Rouhani tweeted on Sunday.

Iran's transport minister said that Tehran plans to purchase 114 aircraft from Airbus.

source: www.abs-cbnnews.com

Brent crude oil hits 2015 high

LONDON - Oil rose more than 3 percent on Thursday, pushing Brent crude to a 2015 high above $63 per barrel on increasing evidence that U.S. production is peaking, balancing a market that has been in heavy oversupply for more than a year.

Oil prices collapsed in the six months to January, pushing Brent down more than 60 percent to almost $45 a barrel.

But the market has gradually recovered this year as much lower prices have discouraged oil exploration and production, especially in the United States.

"People are realising that the U.S. production juggernaut is slowing, at least for now," said Virendra Chauhan, oil analyst at London-based consultancy Energy Aspects.

"U.S. production is down for the second time in three weeks and refinery runs are spiking up, driving demand higher."

Brent crude futures for June on Thursday hit $63.29 a barrel, the highest since December, after the previous much weaker front-month futures contract, for May, expired on Wednesday.

By 0835 GMT, June Brent was at $62.52 a barrel, down 80 cents from the previous close for June, but up sharply from Wednesday's close for May at $60.32.

U.S. crude was at $56.00, down 39 cents after hitting a 2015 high of $56.69 on Wednesday.

U.S. crude has been logging its strongest upswing this year as ebbing fears of an inventory overflow and renewed hedging in far-distance futures flatten the forward curve.

"We turn extremely bullish on oil," Singapore-based energy brokerage Phillips Futures said in a note to clients.

"This whole rally was primarily due to drops in U.S. crude production. We see the four-week average for crude production turning negative for the first time since July '14," it added.

Reuters technical analyst Wang Tao told Reuters Global Oil Forum that Brent could rise towards $70 a barrel in the near term, but that a sharp downturn could happen after that.

U.S. oil prices jumped on Wednesday after U.S. inventories built up more slowly than expected, although still to a new record. Talks between major oil producers also triggered speculation of production cuts, even though most analysts said these were unlikely.

Despite the oil price rally, the market remains oversupplied, analysts say.

"The recent bounce comes despite a surge in OPEC crude oil production in March which is likely to have been sustained in April," ANZ bank said.

source: www.abs-cbnnews.com

Oil price slump sorts the hedged from the unhedged

NEW YORK - Oil's slide to the lowest price in more than five years is carving a divide between U.S. shale drillers who heavily hedged future production and those who didn't.

While financial hedges are commonly required by many oilfield lenders, the industry's mid-sized U.S.-focused shale field producers pursued varied strategies when it came to protecting future revenues, according to a Reuters review of filings and interviews with bankers and experts.

Those decisions are now coming back to haunt some drillers. Best-known is Continental Resources, which lifted its hedges in early November, when oil was trading at around $83 a barrel, leaving it unprotected as prices slipped another $20, the most dramatic drop since the 2008 crisis. Continental's share price has been more than halved since late June.

Apache Corp and Whiting Petroleum are also exposed to lower prices and have underperformed some peers over the past two weeks.

Oil producers typically hedge against lower prices by locking in some of their future production at favorable prices through swap transactions sold by banks, or by buying options as insurance against lower prices.

Among major and mid-sized exploration and production companies, some 35 percent of all 2014 oil production was hedged at an average of $95.5 a barrel as of November, according to an analysis prepared by RBC. Yet only 14.3 percent of 2015 production was hedged.

With OPEC kingpin Saudi Arabia refusing to cut supply and shore up prices any time soon, firms face the prospect of lower revenues for months to come. U.S. crude fell below $60 a barrel on Thursday for the first time since 2009.

At Devon Energy Corp, the effect of tumbling prices "may not be nearly as large as you think" because of hedging, said Dave Hager, Devon's chief operating officer, at the CapitalOne Energy Conference on Wednesday. "We're in outstanding shape as a company."

Devon, which pumped over 80 percent of its oil from U.S. shale fields last quarter, stands out as the most aggressive hedger among the larger-cap U.S. oil drillers. It has hedged about 140,000 barrels per day (bpd) of crude for all of next year, equivalent to 80 percent of its third quarter output, according to company filings.

If U.S. crude prices were to remain at about $65 a barrel next year, those hedges could net Devon an extra $1.3 billion in revenue, according to Reuters calculations.

Devon has been "very good at not drinking the Kool-Aid" in an industry that had been counting on years of high prices, said Rick Rule, chairman of Sprott US Holdings, an asset management firm that doesn't own stock in Devon.

STEADY PACE

For the past several years, hedging was a relatively minor consideration for investors. Oil prices stayed fairly steady at about $100 a barrel, meaning most hedged positions were neither heavily in nor out of the money.

Now that the crude price has almost halved in the past six months, and predictions grow for a prolonged slump in prices, investors are scrutinizing filings to understand which corporations were clever enough to have locked in prices prior to the slump and therefore have enough cash on hand to pay increasingly expensive service contracts.

"The purpose of hedging is to secure cash flow regardless of price scenario," said Robert Campbell, head of oil products research at Energy Aspects in New York. "The whole thing with (shale drillers) is cash preservation."

Most large-cap producers, unlike Devon, don't hedge as a rule, and many such as Occidental Petroleum and ConocoPhilips have even outperformed Oklahoma City-based Devon in recent months, aided in part by their refinery holdings, which generate additional revenue when oil prices are down.

Some analysts point to Apache as an example of the perils of not hedging. While Devon's shares have fallen by 32 percent since June, Apache's have dropped by 44 percent as investors raise alarms about a potential cash crunch.

"They're basically naked and don't have any cash flow protection," said Leo Mariani, a senior analyst at Capital Markets.

REVENUE VOLATILITY

While hedging helps producers stem losses when prices are low, it also caps their potential gains. Many lenders require their clients to place some hedges on future production in order to smooth out revenue volatility.

But others have much more flexibility.

Whiting Petroleum, which like its peer and rival Continental is heavily focused on the Bakken shale fields in North Dakota, had hedged only about 3,000 bpd in 2015, according to the firm's third-quarter SEC filings, or about four percent of its current daily production.

Its acquisition of Kodiak Energy Inc, expected to close early next year, will add another 6,000 barrels a day of hedged production through 2015, a spokesman said - still only 7 percent of the combined company's output at current levels.

That may explain why Whiting's stock has fallen almost 65 percent from all-time highs in late August, though the pending acquisition and its exposure to the higher-cost Bakken play are also likely considerations.

source: www.abs-cbnnews.com