Oil Markets Unimpressed By Crude Output Freeze

Fifty-seven years after the birth of John McEnroe, and there is a racket being made in the oil market.

The racket has been caused by the announcement that four countries - Saudi Arabia, Russia, Qatar and Venezuela - have all committed to freeze crude production at current levels. While seemingly a sacrificial measure on the surface, the reality is that not only are these countries already producing at favorable levels, but the freeze is dependent upon the commitment of other producers. So it is not quite as bullish news as initially seemed, and prices are unwinding gains accordingly.

It was not a tough decision for Russia to agree to a production freeze. It is already producing at a multi-decade, post-Soviet era high, with 10.88 million barrels per day of production in January. All the while, expectations are for its production to slow if anything in the coming year. Related: A Market Collapse Is On The Horizon

As for Saudi Arabia, it is already producing at an elevated 10.1 million bpd, according to secondary sources in the latest monthly OPEC report. If we believe direct communications, output was at a higher 10.23 million bpd. Saudi's mantra last year was to target market share, and accordingly it lifted production from an average of 9.68 million bpd in 2014 to 10.11 million bpd (pssst….where we are now).

Therefore the production freeze will have little impact on Saudi, at least until we move into summertime; the kingdom usually ramps up production by several hundred thousand barrels per day to meet higher domestic demand from power generation. But for now…no biggie.

The third producer present was Venezuela, whose tired and ragged oil industry is pumping at 2.3 million bpd; if it could raise production it would have done so already, so a moot point on their front. And finally, Qatar is extremely steady (but a small oil producer in the grand scheme of things) at ~660,000 barrels per day.

Related: If A Cut Is Going To Come It Won't Be From OPEC

Yet although this freeze seems more cursory than critical, comments from Saudi oil minister Ali al-Naimi point to the potential for more meaningful action ahead (seeming unlikely, but hey): "The reason we agreed to a potential freeze of production is simply the beginning of a process to assess in the next few months and decide whether we need other steps to stabilize the market."

The biggest obstacle to the whole debate, however, remains with the freeze being dependent upon the collaboration of others. Hence, given the unlikely nature of Iraq, and particularly Iran, freezing production at this point, the alacrity and zeal prompted by this meeting result will likely fade like a sugar high.

Moving on, we have had a return to form on the economic data front; the U.K. saw inflation drop on a month-on-month basis by more than expected, while current German economic sentiment came in below consensus, while expectations for the Eurozone were better than expected (but still the lowest level since November 2014). The regional manufacturing gauge for the New York area was weak once more, while Brazilian retail sales were below consensus for December at -2.7 percent, MoM, capping the worst year since records began in 2001.

Eurozone ZEW economic sentiment (source: investing.com)

Finally, back to the producer cut debate, and I leave you with the chart below. It shows how, according to our ClipperData, that Saudi Arabian crude loadings have been increasing versus the prior year. Loadings in January 2016 were up 8 percent YoY, while loadings in 2015 on the whole averaged 6 percent higher than the prior year. It would appear Saudi Arabia is already putting its best foot forward in terms of production, exports, and market share. Related: In Spite Of Its Vast Oil Reserves, Cuba Fails To Woo Investors

By Matt Smith

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