Saudi Arabia and Russia will co-operate to stabilise oil markets

Saudi Arabia and Russia on Monday said they would co-operate to try and stabilise oil markets, but stopped short of agreeing immediate action to restrict production and end a glut that has halved prices in the past two years.

Oil traders have been watching for signs the world’s biggest producers could cap output when they meet in Algiers later this month, with some Opec members clamouring for action to try and shore up the price.

The energy ministers of Russia and Saudi Arabia, which together produce more than a fifth of the world’s crude, said at the G20 in China that they could limit output in the future, while establishing a “working group” to explore other ways to reduce volatility in markets. Russia is the largest exporter outside the Opec cartel.

“Freezing production is one of the preferred possibilities but it does not have to happen specifically today,” Saudi oil minister Khalid Al Falih said.

News of their planned co-operation initially sent prices shooting higher, with international benchmark Brent crude gaining as much as 6 per cent to $49.40 a barrel. But the lack of concrete agreement quickly saw oil prices come off again, with Brent retracing most of its gains to trade nearer $47 a barrel.

The agreement at the G20 followed a meeting between Saudi Deputy Crown Prince Mohammed bin Salman and Russian President Vladimir Putin at the weekend. Greater co-operation has been under discussion for almost a year, but lower prices and the geopolitics of the Middle East, not least the two countries’ support for opposing sides in Syria’s civil war, is an ongoing strain.

 

Russia was ready to join the producers’ cartel in freezing output in April before Saudi Arabia collapsed the talks at the last minute, refusing to join any deal without the participation of its regional rival Iran.

 

Russia’s energy minister Alexander Novak described Monday’s agreement as “historic” but tensions remained readily apparent.

 

While Novak said that an output cap was “the most effective instrument” with details of a plan “currently being discussed”, Falih suggested that freezing production may not be necessary.

 

Novak also said a production deal may not have to include Iran until Tehran’s production had recovered to pre-sanctions levels. Falih said he believed, however, that Iran’s output was already at that level.

 

That possible sticking point may be dealt with between Putin and Prince Mohammed bin Salman – known widely as MBS – who is said to have pulled the plug on April’s deal in Doha. The favoured son of King Salman, MBS exerts great control over the Saudi economy, including plans to transform it through listing a stake in state oil company Saudi Aramco.

Putin said on Monday it would be “fair” to allow Iran to raise production, but it is not clear if the Saudi prince will make the same concession.

Some analysts doubt Saudi Arabia’s willingness to cut production after it led Opec two years ago in its decision to keep production high in the face of rising US shale oil output, triggering a further drop in prices.

That helped squeezed some higher-cost production out of the market and slashed investment, but has also sparked a fight for market share both inside and outside Opec.

Saudi Arabia has insisted it is not flooding the market – its production has reached a record near 10.7m barrels a day. But its own budget has also been hard hit by the crash, even if it is better insulated than poorer Opec members like Venezuela and Nigeria. Some see Saudi Arabia’s frequent talk of production freezes as a fillip to the market as it waits for supply and demand to inch back to balance.

 

“They don’t want to see prices fall back to the lows,” said Petromatrix analyst Olivier Jakob in Zug, Switzerland.”