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Four oil producers agree to freeze output at Jan levels

CNBC CNBC 16/02/2016 Huileng Tan
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Brent (@LCO.1) crude futures pared gains Tuesday following news that Qatar, Saudi Arabia, Russia and Venezuela would lead an effort to freeze output at January levels. 

The large producers met in Doha, Qatar, to discuss measures to tackle a supply glut that's sent prices to 13-year-lows.

Qatar's energy minister, Mohammad bin Saleh al-Sada, said the agreement would help stabilize the market. Saudi oil minister Ali Al-Naimi said the freeze was "adequate" for the market, adding the meeting was successful. He added he hoped producers inside and outside OPEC would adopt the proposal.

Qatar is the current holder of the rotating OPEC presidency.

Earlier, news of the meeting news sparked hopes of an eventual deal on supply cuts, after Saudi Arabia-led oil cartel OPEC previously persistently refused to lower its 30 million barrel-a-day production ceiling in a strategy to squeeze out higher cost energy producers, including U.S. shale companies.

Reuters reported that the meeting had echoes of a 2001 encounter between OPEC and non-OPEC producers when Saudi Arabia pushed through a global deal to curb output in which Russia agreed to participate. But Moscow never properly followed through on its pledge to curb exports. 

After 19 months of declines in oil prices, analyst are cautious, however, of another short-lived bump higher based on jawboning from producers. This is despite the fact that the impetus to agree on price-boosting production cuts has been heightened by budgetary pain in both Russia and Saudi Arabia.

"The noise around potential production cuts is hugely elevated; if we don't see a cohesive response in a month or so, the speculators will no doubt start to ramp up short positions again," IG's chief market strategist, Chris Weston, said in a note.

And Phillips Futures cautioned, "if they allow prices move up in the immediate term, prices would likely be remaining lower for longer. This is because producers of oil at higher breakevens could hedge off their exposure, resulting in strong production moving forward. Thus, would mean that it would still be in the best interest for oil producers, especially those who could still get by to continue and wait it out, no matter how painful it may be."

The Tuesday price spike also masked complications in the oil industry that have clouded the market.

One major issue is how much oil producers were actually pumping out, UBS Wealth Management's commodities and FX strategist Wayne Gordon told CNBC's "Street Signs."

"Some people believe that Saudi Arabia et al have been over-reporting production and exports just so that when they go to the OPEC meeting they can say 'Oh yeah, we cut around here and here'," he said.

The world was still swimming in 1-2 million extra barrels of oil a day, he added.

UBS forecasts oil in the $20-$40-a-barrel range this year.

Also in focus is the fallout and snowball effect of the oil crash, with banks now faced with decisions on what of their commodities assets to write down, at a time when lenders are already under pressure from the Bank of Japan's move into negative interest rates.

"On the Japanese banks side, clearly they've had to take a lot of impairments...(over) commodities assets in the last five years… [then] as you go into negative rates, all you're really doing is forcing banks to take loans or lend money to higher risk propositions," Gordon warned.

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