Production Freeze: Saudi Arabia and Russia Attempt to Limit Oil Price Decline

Published on 22 Mar, 2016

Oil Production Freeze

What Happened?

In a "secretive" meeting held in Doha on Tuesday between Saudi Arabia’s oil minister Ali Al-Naimi and his Russian counterpart Alexander Novakin, it was agreed upon to freeze oil output at January 2016 levels. Representatives from Venezuela and the host Qatar were present during the accord.

What Does it Mean?

Venezuela, whose economy has been hit due to the low oil prices, has been lobbying exporters including Russia, Iran, and Saudi Arabia to arrange a meeting between OPEC and other suppliers in an attempt to curtail supply to acceptable levels.

The international media wan’t privy to the meeting until the morning of Tuesday, the 16th of February.

It has happened before..

This oil diplomacy is synonymous to the one seen earlier during 1998 and 1999 when the OPEC was able to pull off something similar that led to a decade-long bull market. They were able to realize crude prices from $10 to more than $140 per barrel owing to these tactics.

The cartel did all this secretively over months of deliberations in closed door meetings across the globe, eventually announcing production cuts that included OPEC as well as Mexico and Norway.

It’s a Long Road Ahead

Venezuela and other affected nations are hoping to pull off something similar this time, with the current meeting being just a start to what is in store. The two countries have made it clear that the accord depends on other exporters agreeing to it, including Iran — an OPEC member that just came out of continued sanctions and is gearing up to increase production.

Crude Oil Production

Crude Oil Production

Both Saudi Arabia and Russia produced more than 10 million barrels per day, with Saudi Arabia producing 10.2 million barrels a day (planned and unplanned production combined) and Russia producing another 10.8 million barrels a day. Cumulatively, these two countries contributed ~ 22 % of global oil production in January 2016. The countries have agreed at retaining these levels for the foreseeable future, pursuant to other producers also freezing production.

After the continued rout in oil prices since the beginning of 2015 — owing majorly to producers’ un-relenting measures to maintain their market share — this may come out as a positive sign towards a recovery in oil prices.

However there are many challenges at hand that first need to be looked at, namely:

  • Even if President Vladimir Putin agrees to such an accord, Russia faces many obstacles in the near future.
    • With winter temperatures as low as 40 degrees Celsius, the pipelines in Siberia may freeze if pumping is stopped due to the water content in oil and gas that flows through them.
    • Moreover, productions from shut-in wells might never recover to full capacity.
    • The nation will face shortage of storage for the significant proportion of production and entail billions of dollars in investment.
    • Government’s revenues from energy sector which accounts for roughly 40% of the national budget will decline.
  • OPEC’s second biggest producer before sanctions in 2012, Iran is just prepping to increase production by about 1 million barrels per day on the road to regaining its market shares after sanctions were lifted.
    • Iran might not be willing to halt production after a hiatus of years from the oil market.
    • If Iran doesn’t freeze production, Saudi Arabia would be inclined to follow suit.

Iran’s oil minister Bijan Namdar Zanganeh will meet his counterparts from Iraq and Venezuela for further deliberations on Wednesday, as it is believed that Iran and Iraq would play a major role in determining whether Venezuela’s attempts at oil diplomacy result in an end to the rout or not.