Saudi Arabia and Russia: A Broken Record – 9/15/16

The world’s top two crude-oil producers, Saudi Arabia and Russia, pledged to cooperate to stabilize global markets, while failing to announce any real measures to bolster prices and raising the question of what, if anything, they actually hope to accomplish.

The Energy Ministers of Saudi Arabia and Russia have both agreed at a joint press conference that an output freeze would be the most effective way to  restore oil prices, but stopped short of pledging actual production limits. Saudi Arabia and Russia struck a similar agreement earlier this year, but it quickly fell apart in Qatar when the Saudis suddenly insisted that Iran take part.

Meanwhile Iran, continuing to ramp up output to return to pre-sanction levels, is unlikely to agree to adhere to any limits if asked again.

iranian-oil-output

Oil traders and oil officials are skeptical the pact will amount to much.

“Don’t expect anything of substance to be agreed on output at the Algiers meeting,” said Victor Shum, Singapore-based vice president at industry consultant IHS Inc. “It will be a non-event and any attempts to manage output won’t happen. It will be a dud but that’s not a surprise.”

“A freeze doesn’t resolve anything if Saudi Arabia and Russia are both freezing when their production is at a record high,” Saad Rahim, chief economist at oil-trading house Trafigura Group Pte, said in Singapore.

While it’s “easier” to have talks on freezing supplies now than it was at a meeting in Doha earlier this year, a deal is unlikely at a gathering in Algiers later this month, said David Fyfe, Gunvor Group Ltd.’s head of market research and analysis.

“There won’t be an agreement but it does no harm to keep talking about this because that itself is price supportive,” Fyfe said at the Asia Pacific Petroleum Conference in Singapore on Wednesday. “Of course, there’s a risk of crying wolf. But at some stage it’s the law of diminishing returns when you keep talking about a production agreement and not actually reach one.”

Their pessimism is understandable. OPEC members that can raise production are seeking to, the others are already close to short-term limits.

oil-capacity

Still, OPEC and Russia will probably keep at the same dance so long as prices go up whenever they suggest an agreement is coming, and likely after if only to keep up appearances.

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