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Are Rumors of a Saudi Oil Cut True?

Rumors of an Oil Cut Started with a Freeze

Written by Keith Kohl
Posted February 19, 2016

I can't deal with rumors anymore.

And let's be clear that they're just that: rumors.

In just the last few weeks, speculation has run rampant through media headlines.

First, we read that Saudi Arabia and Russia were in talks to cut oil output by 5%, which we both know didn't happen. Yet both countries accused the other of initiating talks, perhaps posturing for a better spot at the negotiation table.

Then there was suddenly news last week that an oil minister from the UAE had said OPEC was ready to cut production.

Right... the UAE. The 2.89 million barrels of crude they extract every day amounts to a trickle of OPEC's total production of 32.63 million barrels per day.

It'll take a lot more than that get the bears out of the driver's seat.

Of course, the latest reports of an output freeze from Saudi Arabia, Russia, Venezuela, and Qatar may hold a little more weight than the other rumors.

Unfortunately, there are a few problems to consider...

All for One, or None for All

Before you go out and refinance your house to bet it all on a crude oil price spike, remember that these countries are simply maintaining their January output levels.

Whether or not this is a precursor to more serious talks of an output cut, however... well, I'll let time decide that one.

Truth is, freezing output doesn't amount to much, and the market would be much more receptive to these four countries maintaining output — if they weren't pumping near record levels already!

I mentioned a few weeks ago that OPEC is already dangerously close to its production capacity of 35.6 million barrels per day.

If every OPEC member fully opened the taps, we'd have less than 3 million barrels per day added to supply. Then again, that's also not to mention the fact that Saudi Arabia accounts for more than two-thirds of OPEC's spare capacity.

And let's not forget Iran...

Almost immediately after the four countries announced their output freeze, Iran said it wouldn't take part.

Well, so much for OPEC unity.

Iran was planning to boost production and exports back up to pre-sanction levels long before this output deal was reached. It began with an increase of around 500,000 barrels of oil per day, which will quickly rise to 1 million barrels per day in the near future (whether or not they're able to, however, I'll save for another day).

And no matter how much you despise Iran for its nuclear ambitions, you can't exactly blame it for wanting to boost output. Its economy has been dragged through the mud from losing oil export revenues.

Between 2012 and 2015 alone, Iran's list of oil customers dropped from 21 to six, and its exports plummeted to 700,000... Believe me, dear reader, there's a reason sanctions are effective.

Of course, the output freeze doesn't address one little hiccup: U.S. drillers. Although North American oil companies are struggling under low oil prices, they don't have a choice when it comes to declining production.

According to the EIA, U.S. oil output, which averaged 9.43 million barrels per day in 2015, is expected to drop nearly 8% this year, then fall another 2.6% in 2017.

And to think that just when the Saudi oil price war started taking a serious toll on its greatest threat to market share — U.S. tight oil production — the House of Saud has to consider cutting production. It's like knocking down Tyson in the last round and not watching to make sure he doesn't get up from the 10-count after a devastating shovel hook you just threw.

I know it seems like we're going in circles here, but there is a light at the end of this tunnel.

If I can offer some humble advice here: don't pay attention to the day-to-day swings in crude.

Look toward the long term, because your portfolio won't benefit from trading gossip from the rumor mill.

Even yesterday, as rumors of a production cut started making the rounds, WTI crude ended up slightly lower by the afternoon. The morning gains on speculation that Iran was going to give in to the pressure and consider slashing output were soon erased.

That isn't to say we aren't at — or very near — a bottom for oil... just don't expect the volatility to suddenly dry overnight.

Until next time,

Keith Kohl Signature

Keith Kohl

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A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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