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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