Oil is going nuts after Russia and Saudi Arabia talked about freezing output

The price of oil is going crazy on Monday as investors around the world react to confirmation that Saudi Arabia and Russia have held talks about the future direction of oil policy.

At a press conference during the G20 summit currently going on in China, Saudi Arabia’s energy minister Khalid al-Falih told reporters that the two countries held discussions about the state of the oil markets which brought them “closer together,” according to a Reuters report.

Al-Falih’s conference was trailed as a “significant announcement” and appears to have disappointed many market participants, who were expecting that a decisive plan of action may be announced. As a result, the price of oil has slipped somewhat from its pre-conference position.

Prior to the announcement, both major oil benchmarks were higher by more than 4.5%, but both have now dropped substantially, trading around 4% higher than at the market open. Here’s how WTI, the US benchmark looks at around 11:00 a.m:

And here’s Brent, the international benchmark:

The announcement came after Saudi deputy crown prince Mohammed bin Salman told Russian President Vladimir Putin on the sidelines of the summit that cooperation between the two countries would bring benefit to the global oil market, according to a report from Reuters.

Russia and Saudi Arabia are probably the two most important oil producers on the planet, with Saudi Arabia the de facto leader of the OPEC cartel of oil-producing nations. Russia, alongside the USA, is one of the two biggest non-OPEC producers. What the two nations do regarding oil policy has profound effects on the markets. For example, at April’s massively anticipated OPEC meeting about a freeze in production, Saudi Arabia refused to cooperate unless Iran joined in any production freeze, and, as a result the meeting ended up as a damp squib.

With the two nations starting to work together, hopes for a solution to the massive glut in the oil industry are rising. However, we have seen promises of co-operation before. For instance, in August, Russian oil minister Alexander Novak told a Saudi newspaper: “With regard to the cooperation with Saudi Arabia, the dialogue between our two countries is developing in a tangible way, whether in the framework of a multi-party structure or on a bilateral level.”

Novak’s words sent the price of oil rocketing at the time.

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