Oil output freeze has a catch: Attracting OPEC unity
AS prices have dropped ever lower, smaller oil producing nations on precarious financial ground have regularly pushed their bigger brethren to stop pumping at record levels and help calm the markets. Now, even the giants are joining the chorus, with Saudi Arabia and Russia on Tuesday calling for a coordinated effort to freeze production. The plan, which also included Venezuela and Qatar, is a tentative sign that major oil producers are ready to cooperate. And it indicates how deeply prices have fallen, as Russia and Saudi Arabia have previously resisted tempering production. But whether the plan actually goes anywhere - or is just chatter meant to bolster prices - is an open debate. The four countries said they would proceed only if others commit. It is not an easy sell. Iraq has a longstanding policy of seeking to raise production regardless of the price-stabilizing policies of the Organization of the Petroleum Exporting Countries, to which it belongs. And Iran has staked out a policy of increasing oil exports now that sanctions have been lifted as part of its "It throws the ball in Iran's court, because they have said their output is going to increase," said Bhushan Bahree, an oil analyst at IHS, a research firm in Washington.
The markets have little confidence in the plan. Brent Crude oil prices initially surged above $35.50 a barrel on discussion of a deal. But the details prompted a drop in prices below $33. "The market does not need a freeze. It needs a reduction," said Michael Lynch, president of Strategic Energy and Economic Research in Massachusetts. "They are not offering anything like that." He added that the plan announced on Tuesday was in the early stages. "People are talking and admitting to concerns about price levels," he said. Even a speculative deal represents a step forward, albeit a somewhat symbolic one. For months, the market chatter focused on the possibility of production cuts. But countries are generally less willing to cut, because doing so means giving up market share for their oil, which might be hard to win back. By holding steady, producers can help ease the pressure on the markets without making difficult decisions. Saudi Arabia, which has kept production at near record levels, cannot pump much more. Venezuela and Qatar have already been maintaining. Russia in January, the month chosen as the highwater mark for output, produced oil at a post-Soviet record of 10.88 million barrels a day. Maintaining this gusher through the year, far from limiting supply on the global market, would allow Russian oil companies to pump more this year than last. "It doesn't cost them much," said Ildar Davletshin, oil and gas analyst at Renaissance Capital, a Russian investment bank. For Russia, "this deal only means maintaining the status quo." The plan, even at this early stage, is a change of tack for Saudi Arabia. As oil prices have slumped, the country, the de facto leader of OPEC, has declined to cut its own production to try to manage the markets.
It is also symbolic that Saudi Arabia and Russia are now presenting a united front on oil. The two countries are geopolitical rivals, backing opposite sides in the Syrian civil war. And Russia, which is not an OPEC member, has historically resisted any binding coordination with the cartel to bolster global oil prices. The rare cooperation reflects the extreme weakness in oil, with prices falling about 70 percent in the last 18 months. Venezuela - and other smaller producers that felt the pain early - has been especially vocal about managing production. The country's economy, which is critically linked to oil prices, is in disarray, and its leadership has little financial backup. Now, the biggest players feel the need to do something about production, or at least talk about it. Although Saudi Arabia still has more than $600 billion in financial reserves, the low price of oil has pushed it to make budgetcutting moves like raising the price of gasoline, electricity and water. Its government is also considering raising money through the sales of assets like airports and, possibly, a stake in the national oil company, Saudi Aramco. In Russia, oil and natural gas taxes make up about 50 percent of the federal budget. And President Vladimir V. Putin of Russia depends deeply on oil, to pay the public sector salaries and pensions that underpin his popularity. It also helps Mr. Putin keep up the army that gives Russia its geopolitical muscle. The next step in the process will be rallying support. The Venezuelan and Qatari oil ministers will meet with their counterparts in Iran and Iraq. They will also visit non-OPEC producers like Oman, Kazakhstan and Azerbaijan. Assuming all are on board, the oil glut could begin to ease, particularly with American output on the decline.