Oil Drops After Saudi Oil Minister Rules Out Production Cuts

Oil prices fell 4 percent on Tuesday after Saudi Oil Minister Ali Al-Naimi ruled out any production cuts, restating the kingdom's rationale for maintaining output was that demand would absorb excess crude that has crushed prices over the past 20 months.

Big oil exporters Saudi Arabia and Russia have proposed to freeze output at January levels, which were near record highs, only if other producers also do the same.

More meetings on the potential freezes will be held in March, al-Naimi told the IHS CERAweek conference in Houston, adding that he expects most of the countries that count to freeze crude production levels.

Analysts and traders remain skeptical that the freeze will be effective in rebalancing the market.

"Saudi Arabia is going to continue pumping - that's the bottom line," said Tariq Zahir, managing member of Tyche Capital Advisors in Laurel Hollow, New York. "The level of trust is not there to implement cuts.".

Even if there is a freeze, it may not represent a reduction that would have an impact.

"If they freeze production at January levels when you're already oversupplied by around a million barrels per day it just prolongs that situation of oversupply," said Energy Aspects analyst Dominic Haywood.

Also, Iran, now free of Western sanctions that hurt its crude trade, is seen as unlikely to agree to an output cap. According to a report from Iran's student news agency ISNA, the country's oil minister said the production freeze is "laughable," because it does not allow Iran to regain its production share.

Benchmark Brent crude futures settled down $1.42, or 4 percent, at $33.27 a barrel, while U.S. crude futures fell $1.52, or 4.6 percent, to $31.87 a barrel.

Tuesday's comments compounded prevailing bearish sentiment on the first day of trading for the April U.S. crude futures contract.

OPEC Secretary-General Abdullah al-Badri said on Monday that if successful, a freeze could trigger other action but the days when the producer group was responsible for cutting output alone are over.

He told the CERAWeek conference the tentative pact to freeze output reached last week between Saudi Arabia, Russia, Venezuela and Qatar was just a start.

An estimated 1 million to 2 million barrels of oil are being produced daily in excess of demand.

Investment bank Jefferies expects OPEC output to hit 32.6 million barrels per day (bpd) in the second quarter, including higher Iranian output, with markets starting to rebalance by the third quarter as production outside OPEC falls by 800,000 bpd this year.

While the market held steady after giving up 4 percent, a further retreat is possible. If U.S. crude futures drop below $31.30 a barrel, there may another downward leg, said Zahir, adding that crude stockpiles are expected to build as refineries shut for spring maintenance.

(By Jessica Resnick-Ault; Additional reporting by Sarah McFarlane in London and Henning Gloystein in Singapore; Editing by Marguerita Choy and Jonathan Oatis)