An oil diplomacy with limited gain output

IT looks like the market euphoria over the accord between Saudi Arabia and Russia to freeze oil production at January's level, if other producers agree, is evaporating and reality gradually sinking in.

Nevertheless, the oil diplomacy has given hope to improve prices at a time when they have sunk to the 2003 level. The mere fact that Ali Al Nuaimi, the Saudi oil minister, and his Russian counterpart, Alexander Novak, met in Doha on February 16 and agreed to freeze production is taken as harbinger for something more to come if other producers came on board.

The meeting was the culmination of expectations in recent weeks that producers driven by low prices will do something to salvage the situation. It was also fuelled by the optimistic statements of the Venezuelan Minister Eulogio del Pino after his visit to Russia and Saudi Arabia. Some even went to the extent that there was a proposal to reduce global oil production by 5 per cent - but this was quickly dashed as it was thought difficult to gather support around it. The meeting in Doha was hosted by Qatar and the Venezuelan minister was also present. The two countries immediately announced their agreement to the accord and so did Iraq, Kuwait and the UAE ... but others remained silent.

Price gyration Initially, prices went up as a reaction to the accord and even before waiting for other producers to announce their agreement or not. But the rise was modest as Brent settled at $34 (Dh125) a barrel compared to the 12 per cent rise on February 14, driven simply by the expectation that producers are about to agree to a production cut.

Prices quickly resumed their gyration and started falling again. They rose as Iran gave its blessing to the accord without any commitment to be part of it after a meeting between the Venezuelan and Qatari ministers with their counterparts from Iran and Iraq in Tehran.

Analysts expected that Iran will not agree to freeze its production as it just came out of the UN sanctions and would want to reclaim 1.5 mil- lion barrels a day (mbd) of lost exports before sanctions were imposed. Rosneft, the largest Russian oil producer, said they have many questions regarding the accord and want sufficient guarantees form Saudi Arabia and Iran. This has put a dent into the Russian ministry of energy's position as it had welcomed the accord.

The market was also not impressed by the duration of the accord - three months - to discover the impact on the market and to see if commercial oil stocks would fall.

However, the Saudi minister kept the door open when he said the accord is only the beginning of the discovery process in the next few months before deciding whether further action is needed to stabilise prices. Dashed hopes But the Saudi foreign minister Adel Al Jubair soon dashed the hopes of the market when he told AFP that his country is "not prepared" to cut production. Prices fell 3.5 per cent as a result and, as I write, prices fell again for Brent and WTI to settle at $33.01 and $29.64 a barrel respectively on February 19.

It is important to be realistic about the accord because freezing does not mean a reduction of production. The IEA is saying that in the first half of 2016, production is expected to be higher by 1.75 mbd over demand. This is over and above the surpluses of 2014 and 2015, which pushed the OECD's commercial stocks to their highest level of 2,971 million barrels by end November and even higher by now. Such stocks will always be an overhang on the market and threaten prices. There are even fears that storage capacities are approaching its operational threshold.