Russia, Saudi Arabia agree to extend oil production cut

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

Russia and Saudi Arabia – the two biggest oil producers alongside the US – announced today Monday that they had agreed to extend oil production cuts for a further 9 months to March 2018.

The decision was announced in the form of a statement issued by the Russian and Saudi Energy Ministers, Alexander Novak and Khalid al-Falih.  In their statement they said they would do “whatever it takes” to rebalance the oil market to eliminate the current supply overhang.

The oil price immediately responded to the announcement with a sharp increase, with the price of Brent crude leaping up by $1.39 to $52.23 per barrel by 1407 GMT.

It is not a foregone conclusion that the further extension of the production cuts will receive the full support of OPEC, without whose agreement the extension is not viable.  Several OPEC states including Iran and Iraq are currently increasing their production, whilst Kazakhstan, an important oil producer which is not a member of OPEC, has already said that it is unwilling to cut production.  However on balance, given Saudi Arabia’s domination of OPEC, it is likely OPEC will agree.

The decision to extend the production cut received Russian President Putin’s seal of approval in Beijing where he made the following comment about it in response to journalists’ questions

Question: We heard just a couple of hours ago that Energy Minister Alexander Novak has reached agreement with the Saudis on extending oil production limits for another nine months, until March 2018, as far as I know. How do you assess this agreement’s prospects, given the shaky and volatile situation with oil?

Vladimir Putin: I think the prospects are good, and the fact that our main partner on this matter – and Saudi Arabia is unquestionably our main partner here – has respected all previous agreements in full is cause for optimism.

More importantly, Saudi Arabia has an interest in maintaining stable and fair oil prices for a number of reasons. I will not list them now, but I think the experts are well aware of these conditions.

Finally, I think it right that the decision was taken not for 2, 3 or 4 months, but for 9 months, into next year. This is the most important condition for stability.

Russia will pursue the policy it has chosen on this issue. I met recently behind closed doors with the heads of our biggest oil and gas companies. This meeting is no secret. We discussed this matter with the Energy Minister, and we support this proposal.

I am less sure of the wisdom of this decision than Putin appears to be.  It seems to me that whilst the production cuts have raised prices – though I suspect by less than the Saudis expected – they have also spurred an increase in production by the shale producers in the US, with the US rig count now the highest in two years and with oil production in the US jumping more than 10% since its mid-2016 low.

I appreciate that many still continue to say that US shale oil production is uneconomic and depends excessively on high liquidity and low interest rates in the US.  That may be true, but as is often the way with a new industry that does not allow for the optimism of the shale oil producers, who must now feel that the worst is over and that they have successfully seen off the challenge they faced from the Saudis.  That will at least in the short term encourage them to drill and produce more even if they make a financial loss by doing so.

I still believe that it would have made better sense to let the market take its course rather than seek to correct the temporary oversupply by artificial production cuts.  However it is clear that Saudi Arabia with its bloated economy and over-ambitious foreign policy was incapable of taking the strain, which is why we are witnessing more attempts to rebalance the market artificially, in a way that I suspect is both counterproductive and premature.


The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.

What do you think?

Notify of
Inline Feedbacks
View all comments

Macron picks insider Edouard Philippe for France’s Prime Minister

Philippines President Duterte survives impeachment attempt