A Saudi-Russian Agreement Is Not Enough to Raise Oil Prices

While Saudi Arabia, Russia and Norway grew production considerably, Iran is only now entering the market.

Tuesday’s agreement between Russia, Saudi Arabia and several other OPEC countries on freezing output levels may be difficult to implement and would not have an immediate effect on oil prices, EastWest Institute fellow Danila Bochkarev, who specializes in Eurasia energy and natural resources issues, told valdaiclub.com.

How viable is the agreement?

There are several issues. First, it is unclear how this agreement would be implemented in Russia, which does not have a single state oil company. Of course, they all have shareholders, to which they are accountable. That is, unlike Saudi Arabia and Qatar, it cannot simply reduce production through correction. Nominally, it is possible, but it is unclear how it would be legally possible to reduce oil production.

Naturally, Russia would try to reach an understanding with many companies. All large companies, relatively speaking, will lower output in any scenario, because January was a peak, while small companies would be negotiated with. There is a complex case for how to do this. Corrective methods are legally unclear; this can only be settled through negotiations.

The second issue is that it is unclear how Iran could be negotiated with. The issue is that while Saudi Arabia, Russia and Norway grew production considerably, Iran is only now entering the market. The only thing they could ask for is a larger market share. They want to restart production at a level of at least 400,000 barrels per day.

Naturally, they are also experiencing difficulties because of decreased budget revenues, but they just had considerable funds unfrozen, over $50 billion. For Iran, it is much more important to return to the European market, where it was crowded out by Saudi Arabia and Russia, over having higher prices right away.

Why are markets reacting inconsistently?

As soon as it becomes clear that some declarations are made, oil surges. This is a commodity, which is very volatile from such news. However, when [Russian energy minister Alexander] Novak said that Russia may join OPEC some time ago, it also surged upward for several days.

It begins with big news stories such as this one turning around the market, but then comes the understanding that overall, there are no actions and it is unclear how Iran would act. However, there is a preliminary agreement among four countries, a very important one; they produce a lot, up to 30 percent of total output, but there are also countries which have not agreed yet. That is why prices come back down, as Iran has not come to an agreement yet.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.