Saudi Arabia and Russia plan fails to stop continued slide in oil price

Production freeze proposal falls flat but analysts hail potential significance

Saudi Arabia’s Oil Minister Ali al-Naimi called on Opec to freeze oil production (Reuters)

A Saudi-Russian deal to prop up global oil prices left oil traders disappointed, but some analysts nevertheless hailed the move as a potential inflexion point in the long energy price rout.

After a meeting in Doha with his Russian counterpart, the Saudi Oil Minister, Ali al-Naimi, said Opec should freeze oil production at January levels in order to support the global oil price, which has fallen by 70 per cent since the summer of 2014. Venezuela and Qatar were also part of the agreement.

“The reason we agreed to a potential freeze of production is simple... to stabilise and improve the market” Mr Naimi told reporters.

“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”.

The oil price had been creeping up in expectation of a possible major announcement, reaching $35 by mid-morning Tuesday.

But it soon sank back when it became apparent that the countries were only talking about a freeze, rather than a production cut, and that the group of countries would require the support of all Opec members, including Iran, to deliver it. Iran is planning to increase its oil export this year following the loosening of Western sanctions after last year’s nuclear deal.

The price of a barrel of Brent Crude carried on falling and ended the day down 2.19 per cent at $32.69. But despite the negative view of traders and the many political obstacles to securing Opec agreement, some analysts said the fact some of the world’s biggest oil producers had managed to overcome their differences to support action was very significant.

“It is one of the first clear acknowledgments by the oil heavyweights that all is not entirely well in the current price environment,” said Helima Croft of RBC Capital Markets.

“Additionally it signals a potential willingness to be more proactive later in the year.”

Index analyst Fawad Razaqzada added: “[The plan] is a step in the right direction and if other major producers follow suit then at the very least it should help to prevent oil prices from suffering further big falls.” After the Saudi-Russian plan was unveiled Iran’s peteroleum minister, Bijan Zangeneh, insisted Tehran would “not forgo its oil market share”, helping to depress the oil price further. Iran has indicated that it will pump until it reaches pre-sanctions production levels of 3 million barrels a day. Riyadh and Tehran are engaged in proxy wars in Syria and Yemen. Saudi Arabia and Russia are also backing different sides in the Syrian conflict.

Russia currently pumps around 11 million barrels a day, while Saudi produces 10 million. Venezuela and Qatar account for 3 million. Together the four states account for a quarter of global production. Russia is the only country of the four not in Opec.

Julian Jessop of Capital Economics said he did expect oil prices to recover over the remainder of the year, rising to over $45 per barrel. But he said this view was based on pick up in global demand and reductions in non-Opec supply rather than the prospects of successful coordination between Opec and Russia.