Oil falls as Saudi, Russian output freeze seen leaving glut

Oil dropped on speculation that a pledge by Saudi Arabia and Russia to freeze production at January levels won’t succeed in tackling the global oil surplus.

West Texas Intermediate crude for March delivery fell 40 cents to close at $29.04 a barrel on the New York Mercantile Exchange. There was no settlement on Monday because of the Presidents Day holiday. Brent for April settlement slipped $1.21, or 3.6 percent, to $32.18 a barrel on the ICE Futures Europe exchange.

The agreement to curtail output depends on other producers following suit, Qatar’s Energy Minister Mohammed bin Saleh al-Sada said in Doha on Tuesday. The pact won’t be meaningful unless Iran and Iraq, which have been raising output, cooperate, according to Commerzbank. Saudi Arabia’s Ali al-Naimi said the freeze could be followed by other steps to improve the market.

“The market is reacting rationally,” said Mike Wittner, head of oil market research in New York at Societe Generale. “There’s been a lot of chatter about a possible cut over the last month, so the reaction has got to be: Is this the best we can do? I struggle to find anything bullish in this announcement.”

Venezuela has lobbied exporters including Russia, Iran and Saudi Arabia to arrange a meeting between OPEC members and other suppliers in an attempt to reach an agreement to balance the market. Brent crude is still down about 14 percent this year amid the outlook for increased Iranian exports. BP predicts the market will remain “tough and choppy” in the first half of the year as it contends with a surplus of 1 million barrels a day.

Russia faces numerous obstacles in cooperating to cut output, even if President Vladimir Putin decides it’s in the national interest. Reducing the flow of crude might damage the nation’s fields and pipelines, require expensive new storage tanks or simply take too long. Production from a shut-in well might never be restored in full, according to Maxim Nechaev, director for Russia at consulting firm IHS Inc.

Rosneft, Russia’s biggest oil producer, sees “questions but no answers,” in the accord, vice president Mikhail Leontyev said by phone from Moscow. Iran isn’t likely to freeze output right after sanctions were lifted, and “if it doesn’t freeze output, how will the others react?”

Iran, the second-biggest producer in the Organization of Petroleum Exporting Countries before sanctions were intensified in 2012, is seeking to boost output by 1 million barrels a day and regain market share after penalties were lifted. The nation has loaded its first cargo to Europe, while Chinese and Spanish companies have also booked shipments.

This story was originally published February 16, 2016 at 4:19 PM with the headline "Oil falls as Saudi, Russian output freeze seen leaving glut."