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Despite Rumors There Is No Indication The Saudis Will Budge

The reason why oil has stormed higher from down over 3 percent to up well over $30 in the span of hours (and dragging futures higher with it), was - as observed earlier - news that Iraq’s Oil Minister Adel Abdul Mahdi said that both Saudi Arabia and Russia, the world’s biggest oil producers, "are now more flexible about cooperating to cut output as crude prices have fallen to levels that hydrocarbon-rich nations didn’t foresee."

“This flexibility should be finalized, and we should hear some solid suggestions coming from all parties,” Abdul Mahdi told reporters at a conference in Kuwait City. He didn’t give details about what the increased Saudi and Russian flexibility entailed, nor did he say how he knew about it.

There is one problem with this: it wasn't the Saudis saying the Saudis should (or would) cut, and in fact, while Aramco's CEO said that there is an even greater glut than expected at 3MM b/d, he made precisely zero mention of Saudi Arabia cutting production at all in the near future.

And sure enough, moments ago Bloomberg's own oil strategist, Julian Lee explained that comments that Saudi Arabia, Iraq and Russia have become more willing to consider production cuts need to be viewed with caution.

Related: Is A Russian, OPEC Production Cut In The Making?

What else he said:

• Saudi Arabia has said it would cut output as part of a broader OPEC, non-OPEC agreement ever since current market share policy was introduced. There’s no indication that position has changed.
• Aramco Chairman Khalid Al-Falih said in Davos last week that the country won’t reverse course unless non-OPEC nations play their part in production cuts
• Iraq only willing to reduce output if others also cut
• Russian government officials continue to say that output reductions would not be effective; Energy Minister Alexander Novak has said several times that artificial production cuts are senseless
• Lukoil’s Leonid Fedun says Russia could work with OPEC if a political decision was taken to cooperate - No such agreement exists.
Parties agree that rising supply has been driven largely by the U.S.

Lee concludes by saying that there’s no mechanism in the U.S. to coordinate supply cuts from large numbers of independent producers who have a duty to their shareholders to maximize revenue. Actually there is a mechanism, if only a short-term one: it is called bankruptcy liquidation, and to get there the Saudis will need to keep the market oversupplied by 3MMb/d for a long, long time to take out said 3 million barrels in excess daily shale supply away from the table.

By Zerohedge

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  • Amz on January 28 2016 said:
    Slowly both US shale and not OPeC production is decreasing , expect a better
    Supply / demand figures by Q2-Q3 2016 ... Then we can talk
    About marginal cuts or orchestrated cuts to even create
    A small deficit
  • bryant on January 28 2016 said:
    "Limiting their output in a coordinated agreement could actually decrease their costs and increase margins." except in the United States this would be considered price fixing. There will never be talks among US companies to bolster price.
  • Joseph Biagioni on January 26 2016 said:
    The rationale in the final paragraph is flawed at least in one aspect. American companies do not have a duty to maximize revenue. They have a duty to maximize PROFITS and shareholder VALUE. Limiting their output in a coordinated agreement could actually decrease their costs and increase margins. Selling 1 barrel for 50 is better than 2 for 30 when COGS are greater than the difference of the revenue between the two.
  • Leo Kobrinsky on January 26 2016 said:
    "Parties agree that rising supply has been driven largely by the U.S." - and nobody will budge until US oil gets strangled.

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