Oil Tumbles After Doha Talks

NEW YORK (DTN) -- New York Mercantile Exchange oil futures settled lower this afternoon on speculation a deal expected this weekend by major oil producers including Russia and Saudi Arabia to freeze output may not do much to reduce a surplus in global oil supply.

"The markets are seeing a round of profit-taking ahead of Sunday's producer summit in Doha, with a production freeze now largely taken for granted, but its impact seen as limited," said Tim Evans, an energy specialist at Citi Futures. "A production cut would be a big bullish surprise, but would require a 180-degree shift on the part of Saudi Arabia, with others following along which we see as highly unlikely."

Risk-off trade, with weaker equities weak U.S. economic data also underpinned the oil markets loss.

NYMEX May West Texas Intermediate crude futures settled $1.14 lower at $40.36 per barrel (bbl), off a four-day low of $39.98, but inched up 64 cents for the week. June Brent crude futures on the IntercontinentalExchange declined 74 cents to $43.10 bbl, off a four-day low of $42.28, but up $1.16 for the week.

Speculation about the output freeze led NYMEX WTI to rebound from a 12-1/2 year low of $26.05 bbl posted Feb. 11 to a $42.42 bbl 4-1/2 month high on Wednesday (4/13).

In products trade, NYMEX May ULSD futures dropped 2.21 cents to $1.2322 gallon, off a four-day low of $1.2046, but up 3.18 cents for the week. NYMEX May RBOB futures plummeted 4.44 cents to $1.4612 gallon at settlement, off a $1.4534 four-day low and down 0.25 cents for the week.

On Wall Street, equities eased ahead of their close for the week amid risk-off trade following data from the Federal Reserve showing U.S. industrial production fell 0.6% in March versus an expected decline of 0.1%. Separate data from the University of Michigan showed consumer sentiment fell to 89.7 points in April from 91 points in March.

For oil traders, the focus was squarely on the Doha meeting to be attended by the Organization of Petroleum Exporting Countries and some non-OPEC countries to discuss freezing output as a step towards reducing supply and rebalancing the market.

Most non-OPEC members won't be there, including the United States, Canada, Norway and others. Russia, which along with Saudi Arabia initiated the output freeze plan, will attend. Libya, an OPEC member, also said it won't attend, but Libya is under producing because of security and other problems.

Initial optimism about the meeting eroded Thursday after Iran said it won't send its oil minister to the Doha meeting because it doesn't plan to freeze its production. Instead, Iran will send junior officials to the Doha meeting and plans to continue raising its supply to pre-sanction's level before considering the proposal to freeze output.

Iran, which won sanctions relief in January, doesn't want to squander the opportunity to raise output and revenues, analysts said. Tehran has said it is targeting raising output to 4.0 million barrels per day (bpd).

On Wednesday in their Monthly Oil Market Report, OPEC cited secondary sources in reporting Iran's crude production at 3.291 million bpd in March, up from 2.944 million bpd in January.

Saudi Arabia wants all OPEC members, including Iran, to freeze output in order for them to also freeze their production. There's little likelihood that this will occur, although Russia and Kuwait suggested an agreement would likely be reached without Iran.

Critics of the plan also argue that freezing output won't rebalance the oil market anytime soon because a production freeze is not a cut, and some of the biggest producers like Saudi Arabia, Iraq and Russia produced at record levels in January. The International Energy Agency noted Thursday the deal to freeze output would have limited impact in reducing the current global oil glut.

Domestically, Baker Hughes Inc. reported that active oil rigs fell by three to 351 during the week-ended today. The rigs data signals the direction of oil production and this latest data came days after the Energy Information Administration said domestic output fell below 9.0 million bpd for the first time since October 2014.

George Orwel can be reached at george.orwel@dtn.com