Saudi/Russian Oil Production Freeze – More or Less Than Meets the Eye?

Saudi Oil

Oil prices have firmed recently, rising almost 40% from multi-year lows in January of 2016 as several OPEC members and Russia prepare to follow up their February agreement to tentatively freeze oil production with an April 17th meeting in Doha. The meeting is slated to discuss formalizing and expanding the measure. However, expectations as to the impact of the so-called “Doha Initiative” have been radically downgraded in recent days due both to statements from participants and potential participants and to reports of rising production from Russia – along with Venezuela, Kuwait, UAE, Saudi Arabia and Qatar one of the members of the initial agreement.

According to the Russia Energy Ministry’s CDU-TEK unit, production of crude and condensate from the country rose to a post USSR high of 10.912 barrels per day (bpd), slightly above the 10.910 bpd reached in January of this year. In addition, in a Bloomberg interview Saudi Arabian deputy premier Mohammed bin Salman indicated that the country plans to raise its output if any other country does. His statement led to an immediate decline in oil prices, as participants downgraded their expectations for the April meeting. Iran has reportedly indicated it will stand firm to its stated intention of boosting oil production now that sanctions on the country have been lifted.

Motivation for a Freeze

The motivation for a production freeze covering OPEC members and other significant producers is not hard to deduce. With prices plunging to 12-year lows below $30 in January of 2016, the budgets of many oil-producing countries stood to take a serious hit from reduced petroleum revenues. At the same time, many of these countries rely too heavily on revenue from the sale of oil for budgetary purposes to make cutting production feasible, even in the face of low oil prices.

With production cuts unlikely to stick, freezing production levels won the day as the best option for supporting oil prices among the six oil producers who agreed to an informal freeze in February of this year. With Iran on record as intending to increase its production, cynical observers might wonder whether the announced freeze was intended more for its psychological effect on oil markets than for its actual impact on production.

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The full article, by Mark Tygart, is available in Issue 3 of Shale Gas International Magazine and can be found on page 34.