Oil giants agree to output freeze | Business| Economy and finance news from a German perspective | DW | 16.02.2016
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Oil giants agree to output freeze

Four of the world's biggest oil producers have unexpectedly teamed up in an attempt to break the painful freefall of the oil price. But the deal hinges on the support of rival exporters. And that's a long shot.

Russia, Saudi Arabia, Qatar and Venezuela reached the tentative deal during an unexpected, closed-door meeting on Tuesday in the Qatari capital Doha.

If finalized, it could mark the first joint OPEC and non-OPEC deal in 15 years. But, warned Russian Energy Minister Alexander Novak, the proposal would only become reality "if other oil producers join the initiative."

The move comes as a trifecta of bad market conditions - oversupply, sluggish demand and an increasingly gloomy global economic outlook - has sent oil prices plunging at break-neck speed. Whereas a barrel went for as much as $115 (103 euros) in mid-2014, it has dropped below $30 in recent months. Following Tuesday's announcement, a barrel of Brent, the international standard, gained 89 cents to $34.28.

This nose-dive has been particularly excruciating for countries like Russia, Saudi Arabia and Venezuela, whose budgets rely heavily on energy revenues. Riyadh, for instance, ran a $98 billion budget deficit last year.

Qatar's minister Mohammed bin Saleh al-Sada, who is also acting president of the OPEC oil cartel, said the four countries had "agreed to freeze the production at (the) January level."

Iraq on board, but Iran digs in

Meanwhile, Iraq also seems ready to commit to freezing its production. The news agency Reuters on Tuesday quoted a source within the country's Oil Ministry as saying that Iraq would freeze output at January levels if a deal is reached among OPEC and non-OPEC members.

"Iraq is with any decision that contributes to propping up oil prices," the source is quotes as saying. Iraq production hit a record high in January, with output from all of the country's fields averaging 4.775 million barrels per day.

Capping output at January levels is sure to benefit Saudi Arabia and Russia - the world's two top producers and exporters - which pumped out oil at near record highs last month. But it could also make it all the more difficult to get rival producers on board. Especially Iran is likely to dig in its heels. The arch rival of Saudi Arabia has pledged to turn up output levels to eleven after returning to the international market last month, when year's of crippling sanctions were lifted. Contrary to Moscow and Riyadh, Tehran produced at least 1 million barrels per day below its capacity and pre-sanctions levels in January. In other words, Iranians would stand to lose the most from a freeze.

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"We have not yet reached our level of pre-sanctions production. So when we get there, we will be on an equal level, then we can talk," a senior source familiar with Iran's thinking told Reuters.

"Our situation is totally different to those countries that have been producing at high levels for the past few years."

Even so, Qatar's al-Sada cautioned oil producers could pay an even higher price if they waited to act - and that they must act together: "We think other producers need to freeze straight away, including Iran and Iraq. We believe this step is meant to stabilize the market."

Lukewarm reception

While many welcomed Tuesday's surprise development, some analysts said the deal may not do enough to turn the tide.

"Even if they do freeze production at January levels, you have still got global inventory builds which are going to weigh on prices. So whilst it's a positive step, I don't think it will have a huge impact on supply/demand balances, simply because we were oversupplied in January anyway," Energy Aspects' analyst Dominic Haywood told Reuters.

City Index analyst Fawad Razaqzada went one step further, telling news agency AFP, "the news has actually disappointed the market slightly because some people had hoped to see a cut rather than a production freeze."

However, Saudi Oil Minister al-Naimi dismissed such criticism. "The reason we agreed to a potential freeze of production is simple: it is the beginning of a process which we will assess in the next few months and decide if we need other steps to stabilise and improve the market," he told reporters in Doha.

"We don't want significant gyrations in prices, we don't want reduction in supply, we want to meet demand, we want a stable oil price. We have to take a step at a time," he said.

pad/hg (AP, AFP, dpa, Reuters)

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