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News // Middle East and OPEC

Historic Saudi-Russian Oil Pact has «No Chance» of coming to anything, say critics

06 September 2016 , 16:20Ship&BunkerNeftegaz.RU672

Like so much of the talk leading up to the OPEC freeze meeting later this month, news of Saudi Arabia and Russia agreeing on September 5, 2016, to act together to stabilize oil looks good on paper – but critics dismiss it as just yet more lip service.

 

Alexander Novak and Khalid al-Falih, the energy ministers of Russia and Saudi respectively, released a joint statement that they both «recognized the need to restrain an excessive volatility of the oil market» and agree to act together «in order to stabilize the oil market.»

The duo said they will chair the first Russia-Saudi task force on oil and gas in October, to monitor the market, draft recommendations to stabilize prices, and ensure steady investment in the industry; their initiative is reportedly supported by the energy ministers of Kuwait and the United Arab Emirates.

Novak later told the Russian press, «We believe that the market right now is taking too long to balance out, it's been two years, and joint steps which were considered earlier this year including a production freeze could be a great help in helping to balance the markets as soon as possible»; he also said this was an «historic moment» in relations between OPEC and non-OPEC members.

For his part, al-Falih later remarked that the freeze «is not the only solution» - but he refused to elaborate further, other than to say that his kingdom will try and encourage other members to consider a production freeze during the Algeria talks.

 

But no sooner did the ministers issue their statements than media noted that neither the Russians nor Saudis had actually agreed to freeze production, and Axel Herlinghaus, senior commodities analyst at DZ Bank AG, set the tone for the analytical community by stating, «At first appearance it sounds a little bit as new wine in old bottles; in the past there was no lack of ambitious announcements, but a lack of decisive follow-up actions.»

Predictably, however, the Russia/Saudi pact caused oil prices to jump.

 

Eugen Weinberg, head of commodity research at Commerzbank, said crude might even go higher in the near term, but he added, «The running gag of the 'freeze' means just nothing; as to the cooperation between Russia and Saudi Arabia — no chance!

«It's clearly just lip service, since real cooperation between these competitors is just impossible.»

 

Ole Hansen, head of commodities strategy at SaxoBank, dismissed the Russian/Saudi pact as highlighting «key producers» ability to talk up the market without backing it by action.

«I expect the market to drift lower as this was an exercise in building up expectations without delivering anything.»

 

Fereidun Fesharaki, founder of FACTS Global Energy, offered what is arguably the harshest version yet of the majority analytical opinion by pointing out that "Fundamentals do not change at all with the freeze: Saudis have upped their production to 10.7 million barrels per day, so immediate surge capacity for them is not more than 200,000 to 300,000 barrels per day.

«They max production, then they talk freeze, and markets are so stupid they take this as positive.»

 

Last week, Russian president Vladmir Putin told Bloomberg with regards to a freeze proposal that «it would be correct to find some sort of compromise; I am confident everyone understands that.»

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