commodities

A (C)rude Awakening: Russia and Saudi Arabia Sign an Oil Deal

On Monday, Saudi Arabia and Russia have signed an oil pact that may well determine the near future of fossil fuel, and it will definitely affect the oil prices as a whole. In their statements, both sides have agreed not to act immediately so as not to provoke additional repercussions on the market, but their oil production output will be changed dramatically in the future. This, along with other factors such as major oil companies is expected to effectively determine the price of black gold well into the 2020’s, according to some analysts.

The deal

Prior to the deal getting signed and the joint statement in which Saudi Arabia and Russia agreed to limit their future output in a coordinated manner, both Russian President Vladimir Putin and Saudi Deputy Crown Prince Mohammed bin Salman had a meeting at the margins of the G20 summit in China where the bulk of the agreement was likely made. In any case, if successful, the deal between two largest oil producing countries in the world is expected to cause a surge in oil prices that may well lead to their recovery.

According to Alexander Novak, Russian Energy Minister, both Russia and Saudi Arabia are trying to reach a strategic partnership in terms of energy, which would in turn generate enough mutual trust to significantly affect various other changes in the global plan. Could this mean Saudi Arabia is considering a geopolitical shift towards Moscow? Saudi Energy Minister was less clear on the issue, but maintained that the agreement should appeal to other oil producers to join in as well, in due time.

As for the effects of this proposal, oil prices soared almost 5 points even before the news conference of the two ministers was held, so it would be fair to conclude the market is certainly responding to this development, and in a positive manner to boot. This is a nice change compared to the oil developments the world has witnessed for the last couple of years. Still, an immediate action would have surely provided a much larger and more sustained price movement.

Why not act immediately?

According to both ministers, the need to freeze production is not urgent and this type of rash decision would have likely caused more harm than good in the long run anyway. While both sides have agreed to reduce production in the near future and therefore raise the price of oil, it remains to be seen whether it will be followed by other, similar arrangements and deals. Bear in mind that a similar initiative within OPEC has failed spectacularly due to strained relations between Saudi Arabia and Iran.

However, now that the Saudis are getting friendly with one of Iran’s main allies and supporters, perhaps Riyadh and Teheran can lower tensions and reach some sort of compromise after all. Although, this could very well be some wishful thinking on our part, as the two are still in bitter conflict, especially in Syria and Yemen, the latter conflict taking a serious toll on the Saudi Arabia.

As for the Organization of the Petroleum Exporting Countries (OPEC), there is an informal meeting scheduled this month that will take place in Algeria. This could very well be the reason why no immediate action in lowering production outputs is being taken at the moment. Any such act might weaken the Saudi position during the informal meeting, and therefore reduce their chances of getting other OPEC countries to join in. Of course, the more countries jump on the bandwagon, the stronger the market will react and vice versa. Saudi Arabia and Russia alone have the power to impact the market in a serious manner, but they need the others to pitch in if the situation is to become sustainable in the future.

So, all is well? (Conclusion)

Yes and no. Even if the general consensus is reached this month – which does not seem likely – we should not expect any official agreements or major developments until November, when the official OPEC meeting is to take place in Vienna. And one final development, which could very well drive the final nail in the coffin of this endeavor, would be the U.S. involvement in the whole affair. Several analysts have pointed to the sharp increase in U.S. oil production as the chief instigator of this major oil crisis that is gripping the world and which has caused some severe damage to all major oil exporters.

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