Oil-market rescue no nearer amid Saudi-Russia 'lip service'

A truck drives past pump jacks at an oil field in Russia.
A truck drives past pump jacks at an oil field in Russia.PHOTO: REUTERS

LONDON (BLOOMBERG) - An international agreement to cap crude-oil output in a way that would restrict actual supply and support prices looks no nearer after the two largest producers pledged to cooperate.

Most members of the Organization of Petroleum Exporting Countries that can raise production have indicated they will aim to do so, while others are already close to short-term limits.

A joint statement on Monday (Sept 5) by the oil ministers of Saudi Arabia and Russia, billed as a "significant" announcement, was "without any substance for market balances," Amrita Sen, chief oil analyst at consulting firm Energy Aspects Ltd, said in Singapore.

Although both nations committed to discuss measures to help the oil market, including a potential output freeze, Saudi Arabia said there's no current need to limit production. Russia's Energy Ministry also expressed doubt last week that a cap is needed. Further reducing hopes of a meaningful accord, the two failed to agree on whether Iran has fully restored pre-sanctions output, key to determining whether it should take part in any freeze.

"There is not even a little chance for a real cooperation between Russia and Saudi Arabia," Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said by e-mail. "It's clearly just a lip service, since the real cooperation between these competitors is just impossible."

Opec members are due to meet other producers for informal talks in Algeria later this month. One major issue undermining the impact of a potential freeze deal is that both Saudi Arabia and Russia are already pumping a lot of oil. The Saudis produced a record 10.69 million barrels a day in August, according to a Bloomberg survey of analysts, oil companies and ship-tracking data. Russian oil production jumped in recent days, exceeding 11 million barrels a day for the first time since at least 1991, according to daily data from the Russian Energy Ministry's CDU-TEK unit.

"A freeze doesn't resolve anything if Saudi Arabia and Russia are both freezing when their production is at a record high," Saad Rahim, chief economist at oil-trading house Trafigura Group Pte, said in Singapore.

While Russia appears willing to join an international agreement to steady the market, it's reluctant to lead the process of negotiating a freeze. Deputy Prime Minister Arkady Dvorkovich has said all Opec members must reach consensus on a cap before Russia will participate. Even if a deal is on the table, Iran, Nigeria, Libya and even Iraq could reasonably seek exemptions.

Venezuela has said it's satisfied with the preliminary accord between Saudi Arabia and Russia to at least cooperate.

"We're anticipating that there'll be an excellent climate of dialogue and negotiation among all the producer countries to achieve a historic accord," Venezuela Oil Minister Eulogio Del Pino said from the presidential palace in comments broadcast on state television.

Saudi Arabia will go along with an oil-output freeze if other producing countries agree, Reuters reported, citing Saudi Foreign Minister Adel al-Jubeir speaking in London on Tuesday (Sept 6). There's a risk Iran will be a "spoiler" in plans for a production freeze, al-Jubeir said.

Iran showed Monday that it's ready to pump more crude, with state-run National Iranian Oil Co saying the country can raise production to 4 million barrels a day in two to three months from the current daily level of about 3.8 million. Iran's unwillingness to take part in a previous freeze plan negotiated in April led Saudi Arabia to walk away from the deal.

Iran's President reiterated on Tuesday that while he supports Opec's efforts to stabilize prices, his country must restore production lost during years of sanctions.

"Iran had suffered greatly under sanctions," Hassan Rouhani said, according to a statement on Opec's website citing the Iranian president. Therefore it is "vital for the country to make up its lost oil production," he said at a meeting in Tehran Tuesday with Opec Secretary-General Mohammed Barkindo.

Nigeria may also demand the right to restore production after militant attacks curbed output, while Libya will want to boost volumes that shrank to a fraction of pre-conflict levels. In Iraq, Prime Minister Haidar Al-Abadi has said he'd support a freeze deal, though new Oil Minister Jabbar Al-Luaibi previously called on oil companies to increase production to boost national revenue.

Most of the rest of Opec's members already are pumping as much as they can.

Saudi Arabia and Russia were keen to publicize their rapprochement on Monday, saying their joint statement showed a growing trust and understanding that collaboration is vital to oil's recovery. Yet analysts remain skeptical a meaningful deal can be reached in Algiers.

"Talk is cheap, but they could pay a dear price for crying wolf too often," Commerzbank's Weinberg said.