Valdai Club

Although market reaction has been sluggish, the memorandum in itself is a positive signal, as only a year ago communication between Moscow and Riyadh, whose positions on Syria were radically different, was much less friendly.

During the G20 summit in Hangzhou (China), Russia and Saudi Arabia signed a joint statement to stabilize oil prices. Although it led to a short-lived price hike, the agreement is merely a declaration of intentions, unable to change market dynamics, believes Tatiana Mitrova, Head of Oil and Gas Department at The Energy Research Institute of the Russian Academy of Sciences. At the same time, it gives a powerful signal that Riyadh is ready for dialogue with Moscow.

“As follows from the statement published on the Russian Energy Ministry website, no agreement to freeze output level or to take any other coordinated moves at the oil market have been achieved,” Mitrova told valdaiclub.com.

In their statement, the two sides expressed an aspiration to expand dialogue, recognized the need to contain market volatility, noted the existence of long-term challenges, agreed to hold consultations and set up a joint monitoring working group as well as declared other measures to boost cooperation.

“I think this list is enough to conclude that the two sides held just another protocol meeting with no particular commitments and consequences,” Mitrova said. “Of course, this is much better than nothing or the tense relationship of the past two years, but it has nothing to do with a binding agreement to limit output.”

The reasons why no particular agreements have been reached are quite evident, Mitrova said. “At a time when oil prices are low and both countries are highly dependent on oil and gas revenues, no one is ready to reduce output, because in a long-term prospect this will lead to even lower budget revenues. Meanwhile, it is totally unclear how fast the market will begin to react to these cuts – it is possible that we will have to wait 12 to 24 months,” the expert believes. “And in Russia, where half of output is controlled by private companies, there is no legal way to make them cut output, unless you impose draconian taxes, killing the whole oil industry.”

In addition, Mitrova believes, there is not enough trust between the parties. “There is no way to make the other side comply with the agreement. There is a high temptation to behave opportunistically – actually, this is what OPEC members have demonstrated throughout the organization’s history, as quotas have never been complied with by more than 70%.”

Nevertheless, although market reaction has been sluggish, the memorandum in itself is a positive signal, as only a year ago communication between Moscow and Riyadh, whose positions on Syria were radically different, was much less friendly, the expert pointed out.

“There is a chance that the two sides can agree on freezing output at the current level for the foreseeable future, as both Russia and Saudi Arabia are currently pumping out record volumes of oil and will unlikely be able to maintain this level for a long time. Therefore freezing output without cutting it does not matter much for the market balance. As for a deal to reduce output, I think it is highly unrealistic,” Mitrova concluded.