Saudis, Russians strike a deal? Forget the headlines -- this means next to nothing

Tuesday 16th February 2016

Saudis, Russians strike a deal? Forget the headlines  --  this means next to nothing

ref :- "Saudi Arabia and Russia Agree to Freeze Oil Output" , Bloomberg online

We are not usually in the position of having to give views on  breaking news but we'll stick our necks out on this one. Actually, it's not much of a flyer ..... as we write, we can already see the market reactions to what at first glance might have seemed significant news from Doha.

Rumours of an OPEC deal to cut oil production have been bolstering crude price over the last 2 1/2 trading days, and the market received further support as the oil ministers of Saudi Arabia and Russia (alongside hosts Qatar and Venezuela) met this morning in the Qatari capital. Russia is not a member of OPEC but is the world's second largest oil producer. The outcome of the talks? They have agreed to freeze production levels ...... excuse us if we leave out the fanfares and the bunting. Brent Crude had been trading higher again before the announcement in the hope that there might be signs that actual production CUTS are on the agenda, but has now given back about $1.50 in reaction to what for all the world seems like a non-event.

Where to start about what's disappointing with the so-called deal? In a world where supply exceeds demand and global stockpiles are at record levels, the way to boost prices is not to keep things as they are. Beyond that, the freeze is conditional on other nations agreeing to participate. Good luck with that .... no deal is worth much without Iran and Iraq buying into it, and to put it mildly those two don't look likely to do any such thing. Post-sanction Iran has made very clear its intention to boost its production by 1m barrels per day by year-end and Iraq's production, already at a record 4.35m bpd in January, looks set to climb further as the country struggles to recover from years of conflict and under-investment. And if that wasn't enough, there's the small matter of whether participating nations would in fact stick to agreed production levels  --  past history suggests that is a long way from being guaranteed.

Some of the more optimistic oil executives are already on the newswires putting forward the view that even if a freeze is not likely in itself to provoke any sustained rally in prices, it does provide a foundation at least for more substantial measures later in the year. We'll allow them that .... with a big MAYBE attached. The trouble is that any deal involving Saudi Arabia and Russia seems fraught with issues, not least the fact that they are already both nibbling at each other's traditional markets in China and Eastern Europe respectively. And when you consider that they are backing opposing sides in the war in Syria ..... well, it would take someone with a lot more faith than us to believe that the relationship won't come under serious stress at some point or other.