Saudi, Russian oil deal appears unable to reverse devastating rout

A fragile deal on Tuesday to limit oil production by the world's two largest suppliers

"A promise to freeze output at what is already at record highs is no basis for a price rally," said Chris Weafer, a senior partner at Russian-focused investment consultancy Macro Advisory.

Russia's Energy Ministry said the deal, which also included Qatar and Venezuela, would keep supplies at January levels and is contingent on other producers following suit. Despite the announcement, oil prices edged down on Tuesday to around 32 dollars per barrel.

Last month, oil prices plummeted to their lowest point in years - below 30 dollars a barrel - in a rout that has wreaked havoc on oil-dependent economies, including Russia and Venezuela. As recently as two years ago, prices per barrel were above 100 dollars.

"The oil market is currently oversupplied by up to 1.5 million barrels per day, so freezing output is not a solution," Weafer told dpa.

"For the oil price to even find the support above 30 dollars per barrel from which it can rally there will have to be a cut in existing output. This agreement does not address that problem," he said.

Artem Konchin, senior oil analyst at Otkritie, Russia's largest independent financial group by assets, was slightly more optimistic, saying the 30-dollar mark had become a bottom for the market.

"The market has been fighting for this mark for the past three to four weeks," he told dpa.

"It seems that it is precisely the goal of Russia and Saudi Arabia to keep prices between 30 and 40 dollars," said Sergey Aleksashenko, a former deputy finance minister of Russia.

That range is low for non-conventional oil producers that have high production costs, and it might price them out of the market, according to Aleksashenko and other analysts.

Other members of the Organization of Petroleum Exporting Countries (OPEC) will likely join the deal because of Saudi Arabia's influence over the cartel, said Aleksashenko, who is a senior fellow at the Brookings Institution think tank in Washington.

A major factor influencing oil prices is how much Iran might continue to boost its supplies to the global market following the removal of international sanctions against the country.

A meeting with Iran and Iraq to decide whether they will follow suit with Tuesday's deal was planned for the next day.

However, Iran's oil minister, Bijan Namdar Zangeneh, said ahead of the meeting that his country would be unwilling to forgo its share of the market.

"I don't think the Iranian oil production growth will have anything more than a sentimental impact," said Konchin. "This new oil production can easily fit into China's growing storage capacity, for example."

Iraq also had a record output last month, Konchin told dpa. "So freezing it at a record high is not such a bad idea," he thinks.

Ehsan Ul-Haq, an oil analyst at the Britain-based consultancy KBC, predicted that the deal will not result in overall lower supplies from OPEC.

"With Iran unlikely to limit its production increase following the lifting of sanctions, total OPEC supplies will rise this year instead of decreasing," Ul-Haq told dpa.

"This will keep oil prices under pressure with the possibility of Brent [oil] falling once again under 30 dollars per barrel," he said. "Production cuts might be introduced in 2017 but look unlikely this year."

He predicted that low prices would eventually drive out high-cost producers.

Konchin agreed, saying that initial output cuts might come mainly from the United States and the North Sea.

"It will be a natural process due to a slowdown in investments, rather than a conscientious decision to shut the wells off," Konchin said.

Last update: Tue, 16/02/2016 - 20:07
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