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Crude Economics
Why a Russia-Saudi Output Freeze Isn’t Sending Oil Prices Up

Oil ministers from Saudi Arabia and Russia were joined by their Qatari and Venezuelan counterparts in Doha this week for a meeting that produced an agreement to freeze their oil output at current levels. This sort of coordination comes as the petrostates are looking for ways to cope with bargain crude prices that are some $80 cheaper now than they were 20 months ago. Yet, oil prices have responded by falling yet again in trading today. Why? Well, the deal isn’t doing much to erase the global glut.

First, the Saudis and Russians say that they’ll only be willing to freeze output at current levels, leaving out (for now) the possibility of significant cuts. Both countries have been pumping at full capacity recently, with the Russians setting a post-Soviet record for production last month and the Saudis keeping their own output up in an attempt to fight for their market share. Freezing production at current levels won’t do much to erase the oversupply that’s depressed prices.

But the agreement is also contingent on the world’s other big producers also agreeing to freeze output at current levels. With Iran set to ramp up its own production now that Western sanctions have been lifted, that’s a very shaky condition. The FT reports:

In a bid to bring the most reluctant Opec members onboard, Venezuela oil minister Eulogio del Pino, who has led the diplomatic push for a deal, will travel to Tehran on Wednesday to meet officials from Iran and Iraq. […]

Iran has repeatedly said it plans to revive its oil exports after the lifting of sanctions against its oil industry last month. This week it loaded the first three tankers with crude for Europe since 2012.

It’s very difficult to see how Tehran might agree to go back on its stated plan to ramp up output by as much as one million barrels per day in the coming months. And so, Brent crude is down more than 3 percent today while America’s WTI continues to linger around $29 per barrel. The market hasn’t responded to this agreement because it doesn’t appear to amount to much.

However, consider: If the world’s petrostates are able to put aside their differences sometime in the future and find a way to trust one another to reduce production, and prices do go up, it will be American shale producers that benefit the most. And with a flood of “fracklogged” wells just waiting for such a rebound, it’s unlikely we’re going to see oversupply concerns erased anytime soon.

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  • ljgude

    There is also the debt bubble in the awl biznes that has got to be hurting, despite technological improvements mentioned here recently on AI, which are allowing some US fracking operations to remain profitable at current levels. I’ve read oil related debt estimates as high as $14 trillion which I find hard to credit, but it still looks to me that the flooding of the market has got to cause a painful shakeout of the overextended with consequences reaching well beyond the oil patch. Iran coming back on line at this point in time and Venezuela being desperate seem to me to add to unplanned supply side pressure.

  • Proud Skeptic

    Somebody please tell me why we should be concerned about the welfare of Venezuela? The country has spent the last decade and a half destroying itself. All of a sudden they are in trouble and I am supposed to care? I feel bad for the people of course. They got suckered into believing the classic socialist paradise claptrap that educated people abandoned years ago. But it was their choice.

    Once upon a time, Venezuela was a friendly country with a nice income from oil. Now look at them.

    Whatever ye shall sow, so shall ye reap.

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