Oil Prices Tumble on OPEC Skepticism

Oil Pumping Jacks Operating At MND AS Depot As $30 Barrel Gets CloserPumping units, also known as "nodding donkey's" or pumping jacks, stand silhouetted against the sun at an oil plant operated by Moravske Naftove Doly (MND) AS in Damborice, Czech Republic, on Friday, Jan. 8, 2016. Photographer: Martin Divisek/Bloomberg

Oil futures fell sharply Friday, posting their biggest daily loss in two months on skepticism that the world’s largest exporters can cooperate and ease a supply glut that has dragged down prices for two years.

Crude dropped just before noon after Bloomberg News reported Saudi Arabia doesn’t expect the Organization of the Petroleum Exporting Countries to reach an agreement when it meets Wednesday in Algeria’s capital. The comments echo those made last weekend by the group’s secretary-general to Algeria’s state news agency APS that the meeting is informal and not for decision-making.

Traders “are reacting with disappointment and disgust,” said Donald Morton, senior vice president at Herbert J. Sims Co., who runs an energy-trading desk.

Light, sweet crude for November delivery settled down $1.84, or 4%, to $44.48 a barrel on the New York Mercantile Exchange. It was the largest daily loss since July 13 and erased most of the gains from a four-session winning streak. Nymex crude ended the week up 86 cents, or 2%.

Brent, the global benchmark, lost $1.76, or 3.7%, to $45.89 a barrel. It ended the week up 12 cents, or 0.3%.

Saudi Arabian and Iranian oil officials have clashed this week over production limits while meeting at the OPEC headquarters in Vienna, The Wall Street Journal reported Friday. Saudi Arabia and Iran couldn’t agree on what statistics should be used to determine oil output levels for a potential “freeze”—the term used to describe a joint effort by big producers to limit their petroleum output at the current pace or lower.

Short bursts of optimism have often been broken by news of internal disputes and by widespread skepticism from analysts and traders about OPEC’s ability to strike a deal. Heavyweights including Saudi Arabia, Iran and Iraq have longstanding political rivalries and have been in a fierce competition to undercut each other and sell more oil.

Analysts at Macquarie Group issued a note Friday advising traders to sell on almost any outcome from OPEC’s talks. A concrete deal with detailed parameters on output limits from all parties is the least likely outcome, and even if they do reach a deal, it is likely to be littered with exceptions and waivers, and at best lead to a short-lived rally, the bank’s analysts said.

“Even an agreement to freeze would not be bullish either, given how high current production levels are. The only bullish case would be a credible and significant supply cut, which as it stands right now is extremely unlikely,” said Tamas Varga, an analyst at PVM Oil Associates.

At 11 million barrels a day, Russian production levels are at their highest since the collapse of the Soviet Union, according to Commerzbank commodities researchers. “The supply of crude oil remains ample, in other words,” the bank’s analysts added in a note Thursday.

Prices have often been bolstered by rhetoric from major OPEC producers since late August when they broached the idea of informal talks and better cooperation. Saudi Arabia and Russia this month signed an oil-cooperation agreement. OPEC oil chief Mohammed Barkindo last weekend said that if agreed by all parties, an emergency meeting could be called later this year to solidify a policy. Venezuelan President Nicolás Maduro also has said OPEC and non-OPEC members were close to a deal.

“There’s a chance of success,” said Robert Minter, investment strategist at Aberdeen Asset Management, which had $402.8 billion in assets under management at the end of June. “It would at least show that they can once again act together and achieve a consensus.”

A senior OPEC official was quoted by the Journal as saying that OPEC has to keep the chatter going, “to make sure prices don’t fall to a certain level or rise to a certain level they don’t like, and recently we have seen a lot of that.”

Gasoline futures settled down 2.49 cents, or 1.8%, at $1.3769 a gallon. They lost 5.8% for the week, the worst performance since the week ended Sept. 2.

Diesel futures lost 4.69 cents, or 3.2%, to $1.4073 a gallon. That canceled out nearly all the gains from the week, which diesel finished up just 0.2%.

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya

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