Saudis & Russia Freeze Oil Output

Doha, Qatar (Reuters) – Top oil exporters Russia and Saudi Arabia agreed on Tuesday to freeze output levels but said the deal was contingent on other producers joining in—a major sticking point, with Iran absent from the talks and determined to raise production.

The Saudi, Russian, Qatari and Venezuelan oil ministers announced the proposal after a previously undisclosed meeting in Doha. It could become the first joint OPEC and non-OPEC deal in 15 years, aimed at tackling a growing oversupply of crude and helping prices recover from their lowest in over a decade.

Saudi Oil Minister Ali al-Naimi said freezing production at January levels—near record highs—was an adequate measure, and he hoped other producers would adopt the plan. Venezuelan Oil Minister Eulogio Del Pino said more talks would take place with Iran and Iraq on Wednesday in Tehran.

‘Beginning Of A Process’

"The reason we agreed to a potential freeze of production is simple: It is the beginning of a process which we will assess in the next few months and decide if we need other steps to stabilize and improve the market," al-Naimi told reporters.

"We don't want significant gyrations in prices, we don't want reduction in supply, we want to meet demand, we want a stable oil price. We have to take a step at a time," he added.

Prices for Brent crude oil jumped to $35.55 per barrel after the news about the secret meeting, but later pared gains to trade below $34 on concerns that Iran may reject the deal.

OPEC member Iran—Saudi Arabia's regional archrival—has pledged to steeply increase output in the coming months as it looks to regain market share lost after years of international sanctions, which were lifted in January following a deal with world powers over its nuclear program.

Iran In ‘Different Situation’

"Our situation is totally different to those countries that have been producing at high levels for the past few years," a senior source familiar with Iran's thinking told Reuters.

Iranian Oil Minister Bijan Zanganeh also indicated Tehran would not agree to freezing its output at January levels, saying the country would not give up its appropriate share of the global oil market.

However, two non-Iranian sources told Reuters Iran may be offered special terms as part of the output freeze deal. "Iran is returning to the market and needs to be given a special chance but it also needs to make some calculations," said one.

"The agreement (if successful) should support oil prices but there are reasons to be cautious. Not all OPEC members have signed up to the deal—notably Iran and Iraq. History would also suggest that compliance may be an issue," said Capital Economics' analyst Jason Tuvey.

Russia’s History Of Noncompliance

OPEC has been quarreling for decades over output levels, and Russia—which last agreed to cooperate with OPEC back in 2001—never followed through on its pledge, and raised exports instead.

Also complicating any potential agreement is the geopolitical rivalry in the Middle East between Sunni Muslim power Saudi Arabia and Shi'ite Iran. Saudi Arabia and its Gulf allies are fighting proxy conflicts with Russia and Iran in the region, including in Syria and Yemen.

In Syria's five-year-old civil war, Riyadh politically and financially backs some rebel groups battling President Bashar al-Assad's government, which has gained the upper hand with the help of Russian warplanes and Iranian-backed Shi'ite militias.

The Doha meeting came after more than 18 months of declining oil prices, knocking crude below $30 a barrel for the first time in more than a decade from as high as $115 a barrel in mid-2014.

"Even if they do freeze production at January levels, you have still got global inventory builds which are going to weigh on prices. So whilst it's a positive step, I don't think it will have a huge impact on supply/demand balances, simply because we were oversupplied in January anyway," said Energy Aspects' analyst Dominic Haywood.