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Offshore Oil Rig

Saudi Arabia and Russia announced their cooperation to stabilize global oil markets, and while crude oil jumped on the news, it quickly gave back more than half of its gains. Does this signal that an production freeze is unlikely to affect crude oil prices at all?

The agreement, explained

Saudi Arabia and Russia agreed to form a working group to monitor the oil markets. They also agreed to draft recommendations to stabilize oil prices, and ensure steady investment in the industry, according to Russian news agency Interfax.

The cooperation, though a positive step, doesn’t point to any concrete immediate steps as the working group is set to meet for the first time next month.

“The market is becoming tired of talk and now want to see some action,” Amrita Sen, chief analyst at the London-based Energy Aspects. “Action is pretty unlikely, but it is still a positive step to see Russia and Saudi Arabia agree to cooperate,” reports The Wall Street Journal.

Saudi Arabian oil minister’s remarks showed lack of conviction

“Freezing production is one of the preferred possibilities but it doesn’t have to happen specifically today,” Saudi’s Oil Minister Khalid al-Falih was reported by Bloomberg as saying, reports Fortune.

While Russian President Vladimir Putin said that Iran should be given leeway, Saudi oil minister, Khalid al Falih, took a different stance, saying that Iran’s production was already high enough.

Such conflicting statements from the oil producers is bound to make traders wary of their commitment to freeze production.

Russia and Saudi Arabia are both pumping oil at record levels

(Click to enlarge)

Most of the nations are pumping oil at record levels and have little spare capacity, as shown in the chart above. Related: Is The Saudi-Russia Deal For Real?

“There is no way they can ramp up their output further in the short- to medium-term,” said Georgi Slavov, an analyst at London brokerage Marex Spectron reports Fortune.

The dark horse

With export restrictions eased, U.S. shale oil drillers—the dark horse—are likely to compete in the Asian markets, especially if there is a production freeze announced by Russia and OPEC. Reuters reports that “new assessments from price reporting agency Argus Media show that West Texas Intermediate (WTI) from the U.S. Gulf coast and Western Canadian heavy oil delivered to China on a cost and freight basis is already competitive.”

Both Saudi Arabia and Russia are at a risk of losing their hard earned market share if they give any slack to the shale oil drillers. Hence, the markets will keenly watch the U.S. oil production figures, even if a freeze is announced by OPEC and Russia, to see whether the fundamental demand and supply difference gets squeezed or not. Related: Record Earthquake Threatens Oil And Gas Industry In Oklahoma

Not so great a track record

It’s not like previous production quotas have been strictly adhered to. OPEC members have been known to exceed their production quotas. Traders believe that it will be the case this time too, as most oil producing nations are reeling under economic strain. It is difficult to expect them to adhere to their quotas if they can gain more revenue by opening their taps a little more.

If action follows words, oil will follow higher

These are difficult times even for the reserve-rich Saudi Arabia—arguably the strongest among the major oil producers. Hence, if OPEC and Russia follow up their words with concrete action, the oil markets and traders will have to respect the fundamental changes it can bring.

However, it will not take oil back to three figures. We should expect oil to trade closer to $60 a barrel levels if we see a production freeze being implemented. Until traders see action, any gains are unlikely to be sustained.

By Rakesh Upadhyay for Oilprice.com

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