WSJ
Saudi Arabia, Russia, Qatar and Venezuela said Tuesday they wouldn’t increase crude-oil output above January’s levels as long as other major oil producers followed suit, in the first coordinated move to boost oil prices in years.
The agreement was struck after a short meeting in Qatar, but it came with a significant caveat: Iran and Iraq must also halt production increases. Iraq’s production has soared to record levels as it furiously pumps to generate revenue to fight a war against Islamic State, while Iran is trying to ramp up output now that Western sanctions over its nuclear program have ended.
Oil prices surged more than 5% higher during the meeting but lost ground after news of the agreement emerged. Brent crude was up 1,6% to almost $34 a barrel and WTI 2.1% to over $30 a barrel in early afternoon European trading.
The pact still marked a significant departure for Saudi Arabia and the Organization of the Petroleum Exporting Countries after more than a year of letting oil prices fall to their lowest levels in more than a decade. A production “freeze” represented a compromise with countries like Venezuela that have wanted an outright cut to bring supply back into line with demand. RELATED OPEC and the Oil Price: Who’s in Charge Now? (Dec. 4, 2015) OPEC’s Oil Output Hits Three-Year High (Dec. 10, 2015) Iran Says It Won’t Join Immediate OPEC Production Cut (Jan. 29, 2016) “Freezing now at the January level is adequate for the market,” said Ali al-Naimi, Saudi Arabia’s oil minister. “We don’t want significant gyrations in prices, we want to meet demand. We want a stable oil price.” Advertisement Mr. Naimi said the move was “simply the beginning of a process to assess in the next few months and decide whether we need other steps to stabilize and improve the market.” He said rising demand would eventually catch up to oil supplies. Iran could be offered special terms to increase its output to a certain level above its January levels, OPEC officials familiar with the matter, said Iran produced 2.99 million barrels a day in January, according to the International Energy Agency, which monitors oil trends for industrialized nations. Bijan Zanganeh, Iran’s oil minister, told state media on Tuesday that it was important for Iran to “not withdraw its share” of the oil market. “It requires discussion and examination,” he said of the Saudi-Russia pact, adding he hadn’t been directly informed of the meeting. Iranian officials previously have said they won’t consider reining in oil production until output hits pre-sanctions levels. Iran has said it ramped up production by 400,000 barrels a day and started shipping crude to Europe. It would have to add another 1 million barrels a day of production before it was at pre-sanctions levels. Venezuelan officials have assured the Saudis that Iran and Iraq can be convinced to go along with the plan, an OPEC official said. Venezuela’s oil minister, Eulogio del Pino plans to meet Iraqi and Iranian oil officials on Wednesday in Tehran. “We will start intensive communication almost straightaway with other major producers, OPEC and non-OPEC, including Iran and Iraq,” said Mohammed al-Sada, Qatar’s minister of energy and industry. “We think other producers need to freeze straight away including Iran and Iraq.” Iraq officials didn’t immediately respond to requests for comment. The price rally on Tuesday morning was short-lived because the market expected a production cut, instead of a production freeze, said Edward Bell, a commodity analyst at Dubai-based Emirates NBD. “I don’t think this does anything to combat the overriding issue of oversupply,” Mr. Bell said in an interview. For Saudi Arabia, the world’s largest exporter of crude oil, the cooperation of other producers has been paramount for any agreement. Higher production from the U.S., Iraq, Russia and others has made OPEC’s price-hiking tool—an output cut—less effective, OPEC officials have said, because it would only benefit rivals. Russia, which isn’t an OPEC member, produced a post-Soviet record in January of 10.88 million barrels a day. Russian Energy Minister Alexander Novak said Russia’s 2016 production would “on average” be at its January levels. Saudi officials have been reluctant to make an output deal with the Kremlin. During oil-price downturns in 2001 and 2008, Russia promised to curb output to prop up prices but instead it increased crude exports while Saudi Arabia cut back. Halting production increases won’t likely help reduce the world’s oversupply of oil. Qatar and Venezuela were already producing at or near capacity, Russia’s production is expected to be flat or decline this year, and Saudi Arabia’s output wasn’t expected to increase significantly. The Saudi-Russia agreement doesn’t represent an official decision by OPEC, which doesn’t meet again until June in Vienna. Freezing production could hurt Saudi Arabia’s exports in the summer, when a larger portion of its crude-oil output is burned domestically to produce electricity for air conditioners. Saudi Arabia often increases its production in the summer to keep exports high while also satisfying local demand.