Saudi Arabia, Russia to Freeze Oil Output Near Record Levels
Comment of the Day

February 16 2016

Commentary by David Fuller

Saudi Arabia, Russia to Freeze Oil Output Near Record Levels

Here is the opening of this topical article from Bloomberg:

Saudi Arabia and Russia agreed to freeze oil output at near-record levels, the first coordinated move by the world’s two largest producers to counter a slump that has pummeled economies, markets and companies.

While the deal is preliminary and doesn’t include Iran, it’s the first significant cooperation between OPEC and non-OPEC producers in 15 years and Saudi Arabia said it’s open to further action. Oil pared gains after the accord was announced, signaling traders see no immediate end to the global supply glut.

The deal to fix production at January levels, which includes Qatar and Venezuela, is the “beginning of a process” that could require “other steps to stabilize and improve the market,” Saudi Oil Minister Ali Al-Naimi said in Doha Tuesday after the talks with Russian Energy Minster Alexander Novak. Qatar and Venezuela also agreed to participate, he said.

Saudi Arabia has resisted making any cuts in output to boost prices from a 12-year low, arguing that it would simply be losing market share unless its rivals also agreed to reduce supplies. Naimi’s comments may continue to feed speculation that the world’s biggest oil producers will take action to revive prices.

“The reason we agreed to a potential freeze of production is simply the beginning of a process” over next few months,” Naimi told reporters. “We don’t want significant gyrations in prices. We don’t want a reduction in supply. We want to meet demand. We want a stable oil price.”

David Fuller's view

Markets were soon disappointed with this surprise announcement because it did not change anything in terms of current oil production. However, it is an important achievement because, as savvy Saudi Oil Minister Ali Al-Naimi said, because it is the “beginning of a process” which could require “other steps to stabilize and improve the market.” 

Given all the acrimony among oil producers, it was wise to hold this first meeting away from the glaring publicity of a usual OPEC meeting, which of course would not have had Russia’s participation.  It should also serve as a warning to short-sellers of crude oil that they can and probably will be caught by surprise when a future production cut is announced.  Lastly, it also indicates that crude oil production is unlikely to increase significantly, despite Iran’s re-emergence as an exporter, because the two largest producers are not planning to increase production even further. 

My guess is that Brent and WTI crude oil have either seen or are very close to their eventual lows, and that prices will move somewhat higher as the year progresses.   

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