Oil retreats as Saudi, Russian output freeze seen leaving glut

Drilling rig

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.

Crude fell 1.4 percent in New York. The agreement depends on other producers following suit, Qatar’s Energy Minister Mohammed bin Saleh al-Sada said in Doha Tuesday. The pact won’t be meaningful unless Iran and Iraq, which have been raising output, cooperate, Commerzbank said. Saudi Arabia’s Ali al- Naimisaid 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 SA. “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 Plc predicts the market will remain “tough and choppy” in the first half as it contends with a surplus of 1 million barrels a day.

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West Texas Intermediate oil for March delivery fell 40 cents to close at $29.04 a barrel on the New York Mercantile Exchange. There was no settlement Monday because of the U.S. Presidents Day holiday. Trades were booked Tuesday for settlement purposes. Total volume traded was 80 percent above the 100-day averageat 2:48 p.m.

Brent for April settlement slipped $1.21, or 3.6 percent, to $32.18 a barrel on the ICE Futures Europe exchange. The European benchmark oil closed at a $1.21 premium to April WTI.

Energy companies were seven of the 10 biggest losers on the Standard & Poor’s 500 Monday. The S&P 500 Oil & Gas Exploration and Production Index dropped 1.4 percent.

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.

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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?” Rosneft will supply its traditional markets with oil in a “competitive battle,” Chief Executive Officer Igor Sechin said in London last week.

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.

“I can’t imagine that the Saudis won’t react if Iran continues to increase production,” said Sarah Emerson, managing director of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. “I think the Iranians have an additional 300,000 barrels a day that they plan to put on the market.”

Saudi Arabia pumped 10.2 million barrels a day in January, below the record of 10.57 million barrels a day set in July, according to a Bloomberg survey. Russia produced nearly 10.9 million the same month, a post-Soviet record, official data show.

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Prices also fell on speculation crude supplies climbed at Cushing, Oklahoma, the delivery point for WTI. Inventories in Cushing rose 700,000 barrels last week, according to a Bloomberg forecast. Stockpiles at the hub advanced to a record 64.7 million barrels in the week ended Feb. 5, the Energy Information Administration said. Nationwide supplies probably increased 3.5 million barrels last week, according to a Bloomberg survey before an EIA report Thursday

“Another Cushing build isn’t too much of a surprise, but will definitely put pressure on price,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors.

Grant Smith and Moming Zhou contributed.