Oil Prices Climb on Hopes for Production Cuts 

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Move difficult to realize, but could tackle oversupply pressuring crude market

Crude-oil prices rose to a three-week high on hopes that Russia and the Organization of the Petroleum Exporting Countries would cooperate on production cuts.

Russia’s energy minister said Thursday that the world’s major oil-producing countries could discuss production cuts at a meeting in February aimed at finding a way to bolster weak oil prices. Oil prices dropped to 12-year lows last week amid robust production around the world and increasing concerns about slowing global growth.

Prices soared more than 7% in intraday trading after Russian news agencies reported the comments.

But futures pared gains later in the session, after a senior OPEC delegate said no emergency meeting had been called. OPEC delegates said an earlier proposal to cut output by 5% had been suggested by Algeria and Venezuela, not the cartel’s most important producer, Saudi Arabia.

Light, sweet crude for March delivery settled up 92 cents, or 2.8%, at $33.22 a barrel on the New York Mercantile Exchange, the highest settlement since Jan. 7. Brent, the global benchmark, rose 79 cents, or 2.4%, to $33.89 a barrel on ICE Futures Europe.

When booming output from the U.S. helped push the global crude market into oversupply in 2014, other large producers responded by increasing their production instead of cutting back. Saudi Arabia and Russia both sharply raised their oil output in 2015, helping keep the market in a glut and sending prices to fresh lows.

OPEC historically has cut production in low-price environments, but the group opted not to take action in the past two years. Saudi Arabia has said that if it cuts production, that would only allow higher-cost producers in the U.S. and elsewhere to drill more wells.

However, the financial pain for large oil-producing nations has intensified this year, as prices fell below $30 a barrel. Some analysts warn they could fall to $20 a barrel or lower.

Currencies of commodity-producing countries have weakened, and government revenues have shrunk, forcing nations to cut spending and draw on reserves. Some members of OPEC, including Venezuela and Nigeria, have for months called on the group to take action.

Saudi Arabia and its Persian Gulf allies have said they would consider cuts only if other large producers, such as Russia, Iraq and Iran do the same. Iraq this week said for the first time that it was ready to consider output reductions if other countries do, too.

“We’ve had a rhetorical shift to some extent this week,” said Helima Croft, chief commodities strategist at RBC Capital Markets. “If you look at the price response…what’s the downside to floating these ideas?”

Russia produced 11.1 million barrels a day of crude oil and liquid fuels in 2015, and Saudi Arabia pumped 10.1 million barrels of crude a day, according to the International Energy Agency. If each country cut production by 5%, that would shrink global oil output by more than a million barrels a day, which is roughly equal to the current oversupply in the market, according to analysts.

“Saudi Arabia remains committed to the balance of the market and is willing to cooperate with others to stabilize the market,” said a Gulf OPEC official familiar with Saudi thinking. “All options will be considered and the doors are open.”

Russian officials have long said they wouldn’t cut production because of the difficulty of halting and restarting production in the freezing conditions of the main producing regions.

Russian officials have indicated in the past that Russia’s contribution to any coordinated production cuts could be made through a natural decline in output. Some oil executives and officials have warned that higher-than-expected taxes this year could lead to a drop in investment and production. Another Gulf official said such an offer would be rejected by the Saudis, “as they are looking for something more credible that the market will buy.”

Gulf officials said some countries are wary of trusting any pledges from Russia, which promised cuts in the early 2000s that it never carried out.

Another concern is that Iran is expected to increase production in the coming months, now that international sanctions are lifted. OPEC Secretary-General Abdalla Salem el-Badri said at the group’s most recent meeting in December that officials would wait to evaluate Iran’s return to the market before meeting again.

“I don’t know how easy it’s going to be for them to get to an agreement,” said Todd Gross, chief investment officer at QERI LLC. If production cuts were announced, he said, oil prices could rally to $50 a barrel.

Mr. Gross said he has made wagers that would profit from increased volatility in oil prices. “Right now we’re entering a phase where rumors are going to move the market 15%,” he said. “You have to be really careful.”

Gasoline futures settled up 3.33 cents, or 3.2%, at $1.079 a gallon. Diesel futures rose 0.57 cent, or 0.6%, to $1.0309 a gallon.

Source: WSJ – Oil Prices Climb on Hopes for Production Cuts

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