Oil prices dropped 2% on Tuesday, dropping further from the previous session’s one-week high on retreating hopes for an agreement between the world’s main two producers to freeze output to put a dent in a global supply glut. Saudi Arabia and Russia came to terms on Monday to cooperate in global oil markets, encouraging Brent crude to hike nearly 5 percent only for it to trims gains following Saudi Energy Minister Khalid al-Falih stated there was no need to freeze output for now.
On Tuesday, Brent crude was trading 73 cents lower at $46.90 a barrel by 12:00 p.m. EDT (1600 GMT). U.S. crude for October, which did not settle on Monday because of the Labor Day holiday, was at $44.42, down 2 cents from Friday’s close. While the Saudi minister downplayed the chances of looming action, his Russian counterpart Alexander Novak said he was open to ideas on what cut-off period to use if countries chose to freeze output and commented even production cuts could be an option.
The OPEC Countries and non-OPEC producers, like Russia, will remain in informal talks in Algeria on Sept. 26-28. Many in the market are hesitant a deal will take place.
“It seems like we’ve found a new trading range in the $40s now and the market is very sensitive to any stories about the possibility of a production freeze,” stated Gene McGillian, a senior analyst at Tradition Energy.
On Tuesday, OPEC Secretary-General Mohammed Barkindo met Iranian Oil Minister Bijan Zanganeh in Tehran. Following the meeting, Zanganeh reported he would endorse any measure to stabilize crude prices near $50-$60 a barrel. Oil prices are half their level of mid-2014, affecting producing nations’ income. OPEC and Russia tried earlier this year to control the glut by searching an output freeze, but the deal fell apart in April due to tension between Saudi Arabia and Iran.
A deal with Iran may be a “headwind” for a larger production deal, according to Morgan Stanley analysts, specifically with Iran boosting up output.
“Iran’s condition appears to be that OPEC must agree to allow Iran to return to its historical OPEC export quota and pre-sanction production levels – a difficult ask,” they wrote in a note. “Even if successful, an OPEC freeze would likely be a short term positive but a medium term negative for oil price.”
In the U.S. market, traders said that the market was endorsed by Genscape data reporting a tie of some 700,000 barrels of crude last week at the Cushing, Oklahoma, delivery hub for U.S. crude futures.