Saudi, Russia agree to freeze oil output
Top oil exporters Russia and Saudi Arabia agreed on Tuesday to freeze output levels but said the deal was contingent on other producers joining in – a major sticking point with Iran absent from the talks and determined to raise production.
The Saudi, Russian, Qatari and Venezuelan oil ministers announced the proposal after a previously undisclosed meeting in Doha. It could become the first joint OPEC and non-OPEC deal in 15 years, aimed at tackling a growing oversupply of crude and helping prices recover from their lowest in over a decade.
Saudi Oil Minister Ali Al Naimi said freezing production at January levels – near record highs – was an adequate measure and he hoped other producers would adopt the plan. Venezuelan Oil Minister Eulogio Del Pino said more talks would take place with Iran and Iraq on Wednesday in Tehran.
“The reason we agreed to a potential freeze of production is simple: it is the beginning of a process which we will assess in the next few months and decide if we need other steps to stabilise and improve the market,” Naimi told reporters.
Iranian Oil Minister Bijan Zanganeh indicated Tehran would not agree to freezing its output at January levels, saying the country would not give up its appropriate share of the global oil market.
However, two non-Iranian sources said Iran may be offered special terms as part of the output freeze deal. “Iran is returning to the market and needs to be given a special chance but it also needs to make some calculations,” said one.
“The agreement (if successful) should support oil prices but there are reasons to be cautious. Not all OPEC members have signed up to the deal – notably Iran and Iraq. History would also suggest that compliance may be an issue,” Capital Economics’ analyst Jason Tuvey said.
Oil prices jumped to $35.55 per barrel after the news about the secret meeting but later pared gains to trade below $34 on concerns that Iran may reject the deal.
OPEC has been quarrelling for decades over output levels and Russia, which last agreed to cooperate with OPEC back in 2001, never followed through on its pledge and raised exports instead.
The Doha meeting came after more than 18 months of declining oil prices, knocking crude below $30 a barrel for the first time in over a decade from as high as $115 a barrel in mid-2014.
The slump was triggered by booming US shale oil output and a decision by Saudi Arabia and its OPEC Gulf allies to raise production to fight for market share and drive higher-cost production out of the market.
But although US output has begun to decline and global demand has been robust it has still not been enough to offset booming global production which has led to oil stockpiles rising to record levels.
Saudi Arabia has long insisted it would reduce supply only if other OPEC and non-OPEC members agreed, but Russia – the world’s biggest oil producer and No.2 exporter – has said it would not join in as its Siberian fields were different from those of OPEC.
The mood began to change in January as oil prices fell below $30 per barrel.
While Venezuela has been the hardest-hit producer, current oil prices are a fraction of what Russia needs to balance its budget as it heads towards parliamentary elections this year. Saudi finances are also suffering badly, running a $98 billion budget deficit last year, which it seeks to trim this year.
But while talking about potential cooperation with OPEC, Russia raised its output to a new record high in January.
“Even if they do freeze production at January levels, you have still got global inventory builds which are going to weigh on prices. So whilst it’s a positive step, I don’t think it will have a huge impact on supply/demand balances, simply because we were oversupplied in January anyway,” Energy Aspects’ analyst Dominic Haywood said. – Reuters
“We don’t want significant gyrations in prices, we don’t want reduction in supply, we want to meet demand, we want a stable oil price. We have to take a step at a time,” he said.
“Our situation is totally different to those countries that have been producing at high levels for the past few years,” said a senior source familiar with Iran’s thinking.