Handshake between Russia, Saudi Arabia fails to lift oil prices

Handshake between Russia, Saudi Arabia fails to lift oil prices

By SHAILENDRA TYAGI | NEW DELHI | 20 February, 2016
A worker checks the valve of an oil pipe at the Lukoil company owned Imilorskoye oil field outside the West Siberian city of Kogalym, Russia on 25 January. REUTERS

The agreement between Saudi Arabia and Russia to freeze their crude oil output at the already elevated January levels has failed to cheer-up the oil prices. Therefore, the attempt to stabilise the falling oil prices between the influential OPEC (Saudi Arabia) and Non-OPEC member (Russia) looks meaningless especially when historical evidence indicates that even the prospect of such a meeting among oil producers would have raised the oil prices immediately.

“This means that the market’s fundamentals are in favour of lower oil price,” says a Delhi based oil expert. She adds that the global oversupply and the expectation of demand remaining subdued are going to keep oil prices low in 2016 “unless there is a meaning cut in oil production by all producers.”

Analysts say that in terms of firming up oil prices, the agreement is probably positive but its actual impact would be realised when other oil producers also join the bandwagon.

Precisely for this reason, both Russia and Saudi Arabia are drumming up support (among other oil producers) espousing their cause for higher oil prices. If others join in, then it would be possible to stabilise the oil prices which have weakened by over 70% since their constant fall from mid-2014.

Both Russia and Saudi Arabia are influential players in the global hydrocarbon market having a sizable reserve for the same. Still they are in favour of a coordinated move. Both have confessed that this handshake is the “beginning of the process” to stabilise oil prices. The depressed oil prices have made every producer anxious to expand their market share to offset their falling revenues.

The success of the handshake would also depend on how Iran — being among the top OPEC producers — plays its cards. Although Iran has an interest in better prices but its decision to join this alliance still remains uncertain. Iran wants to aggressively boost its oil exports as years of West-backed sanctions on its oil exports had crippled its economy. So, they would like themselves to be left out of any binding agreement.  Although traditional oil producers, both OPEC and Non-OPEC, might like to stabilise the falling oil prices but would not wish for a price that is high enough to rejuvenate American shale oil industry.  A better part of the shale industry is lying idle for want of viable prices.


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