Saudi oil out­put freeze sees eco­nom­ics trump en­mity

The Pak Banker - - MARKETS/SPORTS -

The grow­ing pain of plung­ing oil prices has gal­vanised Saudi Ara­bia to look be­yond its ri­valry with Rus­sia and Iran over re­gional con­flicts and pur­sue co­op­er­a­tion on pro­duc­tion, an­a­lysts say. But there are doubts about whether it will last be­cause mu­tual sus­pi­cions re­main deep and the Sunni-ruled Gulf king­doms are loath to cede mar­ket share to Shi­ite Iran as it emerges from years of sanc­tions.

The de­ter­mi­na­tion of Saudi Ara­bia, the world's top oil ex­porter and de facto leader of the OPEC oil car­tel, to pro­tect its mar­ket share has con­trib­uted to a slump in oil prices to 13-year lows. How­ever, in the first sign of OPEC and non-car­tel pro­duc­ers work­ing to­gether since the rout be­gan, Saudi Ara­bia and Rus­sia said Tues­day they would freeze out­put -- if other ma­jor pro­duc­ers do the same.

The move may be a sig­nal from Riyadh that the fall in oil prices has gone too far, said Ja­son Tu­vey, an an­a­lyst at re­search firm Cap­i­tal Eco­nom­ics. "They are ob­vi­ously feel­ing the pain, par­tic­u­lar- ly with a fis­cal squeeze now well un­der way," Tu­vey told AFP. Qatar, Venezuela and Kuwait also agreed to the out­put freeze. Iraq, OPEC's se­cond-largest pro­ducer, said it was pre­pared to co­op­er­ate while the UAE gave its back­ing.

Iran, which is re­turn­ing to world mar­kets as sanc­tions are lifted un­der a nu­clear deal, said af­ter talks in Tehran that it too sup­ported the move, but stopped short of com­mit­ting it­self to any pro­duc­tion curbs.

Even so, the rare show of co­op­er­a­tion be­tween the Middle East's fore­most Sunni and Shi­ite pow­ers, which back op­pos­ing sides in Syria and other con­flicts, sent oil prices soar­ing on world mar­kets.

Rus­sia, like Iran, is back­ing Syr­ian Pres­i­dent Bashar al-As­sad against rebels sup­ported by Saudi Ara­bia. But political and mil­i­tary ri­val­ries will not kill the out­put deal since both sides need money, said oil ex­pert Jean-Fran­cois Seznec of Ge­orge­town Univer­sity.

They "can cut pro­duc­tion, in­crease in­come and still fight each other," he said. "A valid (oil) deal would make it eas­ier to talk about a set­tle­ment in Syria."

Saudi Ara­bia said Thurs­day that the freeze plan did not mean it was con­sid­er­ing re­duc­ing out­put. "If other pro­duc­ers want to limit or agree to a freeze in terms of ad­di­tional pro­duc­tion that may have an im­pact on the mar­ket but Saudi Ara­bia is not pre­pared to cut pro­duc­tion," For­eign Min­is­ter Adel al-Jubeir told AFP in an in­ter­view.

"The oil is­sue will be de­ter­mined by sup­ply and de­mand and by mar­ket forces. The king­dom of Saudi Ara­bia will pro­tect its mar­ket share and we have said so," he added. Saudi Ara­bia, which is also lead­ing a costly mil­i­tary cam­paign against Iran­backed rebels in Ye­men, posted a record $98 bil­lion bud­get deficit last year. Riyadh ex­pects a deficit of $87 bil­lion in 2016, forc­ing it to in­tro­duce a se­ries of aus­ter­ity mea­sures in­clud­ing cuts to sub­si­dies on fu­els, elec­tric­ity and oth­ers. The In­ter­na­tional Mon­e­tary Fund has cut its fore­cast for Saudi eco­nomic growth to just 1.2 per­cent in 2016, the low­est in seven years. On Wed­nes­day, Stan­dard and Poor's down­graded Saudi Ara­bia's credit rat­ing for the se­cond time since Oc­to­ber.

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