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HomeceraweekThis is the real wild card for oil prices to stabilize

This is the real wild card for oil prices to stabilize

When the energy industry gathers in Houston Monday, the big topic will be whether oil prices are actually close to stabilizing after months of painful declines.

The 35th annual IHS CERAWeek conference comes just as the world's largest oil producers — Saudi Arabia and Russia — are talking about ways to support oil prices through a production freeze. While a cap on output will not reduce the world's oil glut, the idea has certainly helped lift crude prices off their lows, but WTI crude was still trading below $30 on Friday afternoon, down near-4 percent.

On Friday, Alexey Texler, Russia's first deputy energy minister, was quoted as saying that the world's excess oil supply could be halved if the freeze takes effect. Qatar and Venezuela joined Saudi Arabia and non-OPEC member Russia in the proposed agreement earlier this week.

The very individuals that could comment on this proposal will be attending the meeting: Saudi Arabian Oil Minister Ali al-Naimi and OPEC Secretary General Abdalla Salem El-Badri. El-Badri speaks Monday afternoon, and Naimi speaks Tuesday morning at 9 a.m. CT.

This is a day of reckoning for oil companies and oil countries.Daniel YerginVice Chairman of IHS

The idea of a production freeze has many proponents, including Daniel Yergin, vice chairman of IHS.

"This is a day of reckoning for oil companies and oil countries, and they need to stabilize the market," Yergin said.

Getting such a deal approved poses challenges since many producers would have to agree to cap production. But there is hope talks could lead to a policy change at the next meeting of the Organization of Petroleum Exporting Countries in June. There has also been speculation members could seek an emergency meeting before then.

"I think the market is beginning to stabilize and perceptions are changing," Yergin said. He noted that there are less negative prognosticators talking about oil prices sinking to $15 to $20 a barrel.

But there is a wild card for the market, and for any producers' deal: Iran. While Iran has said it supports a freeze, there's been no indication it is willing to impose one on its own production. It's in the process of ramping up production with sanctions against its nuclear program being lifted. The idea of more Iranian crude has weighed on the market as traders attempt to gauge just how much oil Iran can actually export. Iran also faces elections at the end of the month, and some analysts say it's unlikely it would agree to hold back on oil sales ahead of that.

At the same time, other forces are at work that will affect the future of the energy industry. "The market is trying to determine whether this is a new era of cooperation between Russia and OPEC," said John Kilduff, partner with Again Capital.

For that reason, industry experts are anxious to hear from the Saudi oil minister Naimi at the event since Saudi Arabia is the driver of OPEC's market-based pricing policy. In an effort to secure its global market share, Saudi Arabia was willing to accept much lower prices.

"Hopefully he'll give us some clarity on what the Saudis' commitment is — freezing production or doing more to stabilize the market," Kilduff said, noting that market watchers wonder if this is just lip service or a game they are trying to play against Iran.

The question of price stability will be an important topic for the global energy industry officials, regulators and political leaders expected to attend IHS CERAWeek.

Mexican President Enrique Peña Nieto speaks Monday, as does Mexican Finance Minister Luis Videgaray Caso. Royal Dutch Shell CEO Ben van Beurden is speaking Tuesday, as does Yilin Wang, chairman of China National Petroleum Corp.

At this time last year, Mexico was playing up plans to bring in outside investment for its natural resource industry.

"The challenge for Mexico is they launched this reform when the mentality was $100 a barrel, and that's not the reality so they've had to have a lot of adjustments. One of the big benefits they're getting is cheap gas from the United States which is helping them bring down electricity costs," Yergin said.

Jose Antonio González Anaya, the new CEO of Pemex, the Mexican energy company, will also attend IHS CERAWeek. Petroleos Mexicanos, or Pemex, has been hit hard by a new round of spending reductions announced this week.

Pemex had a roughly $10 billion third quarter loss, and it has been cutting costs and workers. González Anaya was named CEO earlier this month to turn around the struggling company. He was a former deputy finance minister, and last serviced as director of the Mexican Social Security Institute.

According to Eurasia Group analysts, about $5.4 billion will be cut from Pemex which "will keep Pemex's finances strained and affect Pemex's ability to maintain investment plans." The analysts said Pemex will soon announce its new business plan, and it will try to prioritize the most productive projects and attract investment while cutting costs.

The analysts, in an note, said the Mexican government would also be ready to inject capital into Pemex.

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