I've been following the story since the middle of last year and have stated a number of times that a resolution to this matter will only be found when the biggest producers are the ones at the tail end of the economic damage which has slowly materialised. Up until a few months ago Saudi Arabia had remained steadfast in its decision to rid the market of alternative producers in the US by flooding the market with barrels of oil.
This initially worked with US shale producers feeling the pinch and responding almost immediately with closures of wells that couldn't break even as well as preparing for a financial storm that had been brewing over the levels of debt created in starting up these new ventures. However it didn't stop these producers from exploiting the richest wells with quantity aplenty to help them extend their stay in the oil market a little while longer and become a frustration to the Saudi's.
Added to this a new problem was slowly starting to emerge within the context of the entire world economy where the growth needed to stoke the coals of the economic engine were found wanting with both the US and China letting up far more than would be necessary to nudge things forward.
Double whammy...
Having heard cries of help from other minor producers in OPEC, Saudi merely let those calls fall on deaf ears as they proceeded on but its placed them in a vulnerable position within the oil producing community. Saudi's efforts to curb its ill gotten plans that have backfired and put not only their well-being at jeopardy but the entire membership of OPEC, leaving them open to harsh reactions from those it failed to listen to.
This can't be a good footing to stand on when negotiating the stability of oil prices let alone a steady and consistent relationship amongst its peers in OPEC where co-operation from each party is an absolute necessity which is what we find with fellow member Iran.
Iran's readmission into the oil market has dampened the outlook for the supposed Black Gold as the inventory of barrels stockpiled in Tehran is bound to be sold off to help aid an economy that's been economically isolated for a number of years.When #OPEC & non-OPEC oil meet this weekend, it will be one of the most closely watched #oilsummit in yrs. https://t.co/oAhA3Z0nJu #giforum— Gulf Intelligence (@gulf_intel) April 11, 2016
However the relationship between Tehran and Riyadh hasn't been favourable at the best of times and the recent announcement by Saudi proposing a production freeze was met with a cold tone of defiance when Iran's oil minister was quizzed whether his country would be participating in such agreement. Tehran had explicitly stated its objection to such a proposal before Saudi gave details of a possible way of halting the oil glut.
Sensing that Tehran could drag its heels, Saudi decided to find a better suited candidate that would give an extra notch of credibility to its plans to slow down the rate of oil production worldwide. Russia currently produces 10.9 million barrels per day marginally outstripping that of Saudi Arabia who is currently on 10.6 million bpd. Merging a plan together with both these players does add a degree of a no nonsense approach to the proposal but does it have the staying power to convince others?
Russia tactically got involved as it sees itself becoming a more prominent player in the oil market, possibly suggesting why the annexation of Crimea proved to be a hasty decision taken by Russian President Vladimir Putin. It's also got in on an oil deal with China that OPEC had hoped would've been swung its way but was beaten to the chase having devoting its attention to the oil price wars with the US.
But we should not forget that Russia's own economy has been crippled by the sanctions imposed on it from the West following the annexation of Crimea. Oil plays a significant role in providing much needed income in rebuilding the Russian economy and if Putin's ambitions are anything to go by don't expect anything less than astounding.
Since Saudi Arabia is seen as the leader of OPEC and possibly oil producers, their choice in strategy to freeze production as opposed to cut production was taken because they feels vulnerable of losing this status if it fails to play their cards properly which could see a hugely influential West losing its grip on oil supply since Washington and Riyadh hold close ties that sees a cordial understanding in keeping oil prices and production steady.#Iran #oil production rises to fresh 4-year high of 3.3m b/d (up 300kbd from January) as nuclear sanctions lifted pic.twitter.com/kfBpXaGfZ3— Javier Blas (@JavierBlas2) April 14, 2016
It's not a hidden secret that Iran has suffered from the economic sanctions imposed on it by the US and its dissatisfaction at the way Saudi Arabia has handled threats of new entrants to the oil market. Iran has capacity capable of meeting that of Saudi which would almost diminish the relevance of the latter should they chose to cut back production.
Russia on the other hand sees its ambition to play a more influential role on world politics as a priority with oil being strategic to this goal. It wouldn't miss an opportunity to circle a "wounded animal" so as to say when they see the pressure Saudi has come under in the waking months. Putin is too much of a political manoeuvrist to pass up such a chance to take power away from a controlling nation.
It's because of the above scenarios that I don't see the likelihood of a oil production freeze having an major impact on prices over the long term. The market remains critical and with profit margins being squeezed and debt hanging over the heads of management any significant jump in the price would yield an immediate flurry of selling from producers, pushing back the price from whence it came.
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