Yesterday evening (Feb. 15), word spread that the oil ministers of Russia and Saudi Arabian had made a breakthrough: after years of failure to find common ground on almost any subject of substance, these two titans had agreed to freeze petroleum production, a demonstration of resolve to reduce the global glut of crude and push rock-bottom prices back up. They got Qatar and Venezuela on board, too.
After nearly two years of plummeting prices, it was terrific news. The oil industry’s misery—American shale companies have been pushed into bankruptcy, supermajors have slashed spending and cut tens of thousands of jobs, and oil-producing states including Russia and Saudi Arabia have resorted to dire fiscal measures—was perhaps nearing an end.
Traders pushed the oil price up in anticipation of a more balanced global market.
And then word came of an agreement to “freeze” output at January levels. Prices briefly spiked before the reality of the deal dawned on traders. Both Russia and Saudi have been drilling at record levels—Russia at 10.8 million barrels a day, and Saudi not much lower. That headlong production wouldn’t go higher, but it wouldn’t go any lower either. The rally started to fizzle.
The purported freeze had one crucial caveat—Iran had to agree to keep production at current levels, too. There is an exceedingly slender chance of that happening—no chance, really—since Iran was only freed from international sanctions a month ago.
Tehran plans to increase production by 600,000 to 1 million barrels a day this year, and thus revive market share it lost to the Saudis and others over the past two or three years. If it agreed to freeze now, it would give up that chase almost immediately. In other words, there is no freeze. Prices promptly resumed their downwards spiral.
And the rout continues…