Saudi Arabia and Russia agree deal to freeze oil output

Saudi Arabia has struck a landmark deal with Russia to freeze oil output, in the first co-ordinated move to try to reduce a near record supply glut and halt the collapse in prices.

After watching oil prices fall 70 per cent since mid- 2014, Ali al-Naimi, Saudi Arabia’s powerful oil minister, said an output freeze by some of the world’s leading producers should start to stabilise the market.

Yesterday’s deal, which requires other big producers to agree to cap output, was reached at a closed-door meeting in Doha with Opec members Qatar and Venezuela also in attendance.

The deal between Saudi Arabia and Russia comes against a backdrop of strained political relations between the parties. Tensions remain high over the civil war in Syria, with Moscow and Tehran propping up the regime of President Bashar al-Assad, while Riyadh backs opposition forces.

Traders sceptical

While the speed of the deal between the Opec powerbroker and Russia, the world’s biggest producer, surprised the market, traders remained sceptical that the provisional agreement would gain wider acceptance. Opec member Iran is seen as the biggest stumbling block.

In a bid to bring the most reluctant Opec members on board, Eulogio del Pino, Venezuelan oil minister, who has led the push for a deal, will travel to Tehran today to meet officials from Iran and Iraq.

Bijan Zangeneh, Iran’s oil minister, said the country would not give up its share of the market, according to Iranian news agency Shana. The country has only just started raising exports after the lifting of sanctions last month.

News of the meeting between Saudi and Russian officials caused oil prices to spike as much as 6 per cent but the formal announcement resulted in a sharp reversal as traders calculated it might not remove a significant number of barrels from the market. Brent crude had fallen 3 per cent to $32.39 a barrel late in the day, marking a near 10 per cent intraday swing.

Last month, prices slumped to $27.88 a barrel, the lowest since 2003.

Demand rising

Mr Naimi said after the meeting: “Freezing now at the January level is adequate for the market, we believe . . . We recognise today the supply is going down because of current prices. We also recognise that demand is on the rise.”

A senior Opec Gulf delegate said Riyadh could take further action to help bolster the price, including output cuts if joined by other countries. “We will assess the situation and see if we need to go beyond freezing production,” the delegate said.

Opec has tried to defend its near 40 per cent share of the market by squeezing higher- cost rivals, including the US shale industry.

The deal still marks the first significant supply agreement since Saudi Arabia led the cartel in maintaining production in November 2014.

“Riyadh is trying to show the world and region that it is taking some action,” said John Sfakianakis, a Riyadh-based economist. “But the substantive issue is: who cuts? The issue is that barrels need to be taken off the market, but the view in Riyadh is that we don’t want to be the ones to cut alone.”

Russia has previously said it could not restrict output. Analysts said it might now be willing to compromise on output, even though many Gulf states doubt Moscow will comply. – Copyright The Financial Times Limited 2016