Talk of Russia and Saudi Arabia acquiescing on crude oil production freeze?

CRUDE OIL PRICES ARE RATHER ABRUPTLY HIGHER THIS MORNING and the “talk” in the market is of acquiescence on the part of both Russia and Saudi Arabia on agreeing to some sort of freeze on production at the upcoming pan-energy meeting in Algiers later this month. Mr. Putin has actually stepped into the fray suggesting the possibility…not the actuality; merely the possibility… of a production freeze and even the Saudis have commented upon that possibility. However, the Saudi Oil Minister, Mr. al-Falih, has said that there is no reason to rush toward any such agreement; that perhaps a freeze of some sort is possible but that for the moment the Saudis are not fully engaged in the notion.

Mr al-Falih is painfully aware of the fact that a freeze would send prices higher of course, but only for the briefest of times for any $3-$5/barrel increase in WTI and/or Brent, plus the contango for one and two years, puts prices to levels that shall insure swift increases in production in the Permian, in the Eagle Ford and in the Bakken. Also, Mr. al-Falih and his sponsor, the Deputy Crown Prince Muhammed, know full well that the Norwegians will increase production at a moment’s notice too, with the CEO of Statoil making it public that production from new oil fields in the North Sea are profitable with Brent at or near only $25/barrel.

Further, Iran has every intention of competing for and taking back its lost market share of crude exports. To this end, Iran’s National Iranian Oil Company has announced that it shall complete a pipeline and an export terminal on Kharg Island “by the end of this year.” The facility is expected to export 300,000 bpd by the year’s end. It will be “heavy” crude with an API of approximately 24 and sulfur content of near 2%, putting it on “par” with BCF 24 crude out of Venezuela; with Maya crude out of Mexico and with Bow River crude out of Canada.

Hence, perhaps we have to become used to the fact that WTI may trade only to $50/barrel at its best and may find support only down toward $35/barrel, with the market trading for some very long period of time… years perhaps… between these two reasonable extremes.