Saudi's oil production freeze is making prices slide

Rather than signalling the end of low prices, the agreement between Saudi Arabia, Russia, Qatar, and Venezuela to freeze oil production at January levels, has ushered in a new era of sub-$30 oil.

Production from Russia, Qatar, and Venezuela wasn’t expected to rise so the agreement didn’t change much.

It would have been a more effective agreement if Iran
and Iraq agreed to the freeze.

On top of that, Saudi Arabia produces so much oil, that keeping the taps on near full blast, as they have been in January, will only keep the prices low.

Whereas a production cut would help prices rise, the oil production freeze is only serving to hold the price down — it’s confirmation of prolonged pain for the industry.

Crude oil is now treading lower than it had been for weeks at $28.79 per barrel as of 7.06 a.m. GMT on February 17. This is the day after the agreement, which came out of a secret meeting Tuesday morning.

Initially oil prices rose overnight as observers hoped the Russians had secured a deal to cut production. T
he plunge in the price of oil over the past year has been ruinous for the Russian economy.

But then prices fell again when analysts looked at the hard numbers and realised the deal wasn’t what it was cracked up to be.

The Russians need oil-producing countries to cut output and drive up prices. But the Saudis have resisted cuts, partly because they can produce oil cheaply (and thus feel less pain when the price goes down), and partly because they believe that cutting production will let other countries — such as the US and Russia — steal market share from them in places like China.

Saudi Arabia is arguably to blame for the supply glut because, as a “swing producer,” it produces so much oil that it can shift market prices on its own. Basically, there’s too much oil on the market and the Saudis refused to cut the amount they produce for months.

Low prices hurt the Saudi economy but the country is more interested in trying to kill off oil production competition in the US than keeping its own economy afloat.

It is for this reason that Jonathan Aronson and his team at Credit Suisse told clients in a research note this morning that Saudi Arabia’s supposed re-engagement “in a supply management endeavour” is a bit suspect:

“This seems a U-turn. We doubted that Saudi Arabia was at all interested in trying to rebalance the supply and demand of oil. Oil Minister Ali al-Naimi has spent a year and a half explaining that Saudi Arabia or Opec should not cut back supply and prop up prices so as to let other producers gain share.

“Instead, he and other Saudi officials said that the Kingdom’s longer term interest would be better served by producing at will to meet demand. Markets would eventually rebalance and upside price risk reemerge. The intervening low-price episode would be tough, but more manageable for Saudi than for most other producers.”

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