Oil Prices Fall as Saudi Arabia Backs Out of Production Freeze Agreement

02/24/2016 9:23 am EST

Focus: ENERGY

Michael Berger

President & Founder, Technical420.com

Saudi Arabia seems to be doing anything it can to maintain control of the oil market and though Michael Berger of Technical420.com thinks commodity price volatility should continue to act as a headwind, he still recommends incorporating energy stocks and MLPs—such as these names—into any diversified portfolio.

Well…that did not last long.

One week after Saudi Arabia, Russia, Qatar, and Venezuela committed to freeze oil production at January levels, Saudi Arabia backed out of the agreement.

Their announcement came after Iran’s Oil Minister Bijan Namdar Zanganeh called the proposal ridiculous. Zanganeh said, “It is very ridiculous, they come up with the proposal on freezing oil production and call for this freeze to take place in their 10 million barrels a day production vis-a-vis Iran’s 1 million barrels a day. If Iran’s crude oil production falls, it will be overtaken considerably by the neighboring countries.”

Saudi Arabia Issues Chilling Remarks

After Saudi Arabia’s Oil Minister Ali Al-Naimi said his country will no longer freeze production, he issued a chilling statement at the IHS CERAWeek conference, an annual gathering of the North American oil industry.

Al-Naimi said, “It may sound harsh, and unfortunately it is, but it is the most efficient way to rebalance markets. Cutting low cost production to subsidize higher cost supplies only delays an inevitable reckoning.”

According to Al-Naimi, the market will eventually rebalance because high cost producers will have to cut costs, borrow, or liquidate to deal with the weak oil price environment. He also said that he does not know when the oil price sell-off will end.  

Oil Producers to Discuss Agreement in March

Al-Naimi reaffirmed Saudi Arabia’s commitment to last week’s agreement with Russia, Qatar, and Venezuela and said other producers could join the effort. Al-Naimi said the agreement marks the beginning of a process that will be discussed further in March.

Although Saudi Arabia seems to be doing anything it can to maintain control of the oil market, Al-Naimi said they have not declared war on shale oil and are not trying to increase market share.

Global Oversupply Situations to Continue into 2017

On Monday, the International Energy Agency said the current global oil glut will continue into 2017 as the surplus takes longer to clear than previously expected. The agency does not expect the impact of the freeze to be significant because the four participating countries were already expected to have flat production.

While commodity price volatility should continue to act as a headwind, we recommend incorporating energy stocks and MLPs into any diversified portfolio. Some of the companies that we expect to outperform the market on a longer-term basis are: Concho Resources (CXO), Halliburton (HAL), Baker Hughes, Inc. (BHI), Tesoro Logistics LP (TLLP), and Enterprise Product Partners (EPD).

Michael Berger, Founder and President, Technical420.com

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