Russia-Saudi Deal
Oil Market Stability; Hopes and Fears
On the sidelines of the G20 Summit, which ended on 5 September 2016 in Hangzhou, China, Russian Energy Minister Alexander Novak and his Saudi counterpart Khalid al-Falih made a joint statement aimed at stabilizing crude prices.
Russia and Saudi Arabia recognize the need to contain excess volatility in the market, the statement said.
The two countries will form a working group to monitor the market and draft recommendations to stabilize oil prices and ensure steady investment in the industry. The group will meet, for the first time, next month.
Novak said a production freeze would be one way to stabilize prices.
Novak described Monday's announcement as a "historic moment" in relations between OPEC and non-OPEC members.
Given the significance of such an agreement, it would be necessary to examine its various aspects. This article aims at reviewing challenges and obstacles to Russia-Saudi oil agreement.
Optimistically looking, the agreement signed between OPEC kingpin Saudi Arabia and non-OPEC producer Russia would boost hopes for finding a solution to help shore up oil prices which have experienced a sharp decline since mid-2014.
In their statement, the Russian and Saudi ministers have underlined the importance of constructive dialogue and close cooperation with the objective of supporting oil market stability and guaranteeing long-term investment in different sectors for crude oil production enhancement. In case this agreement is implemented several important events are likely to happen.
First of all, in the light of such an agreement, the oil price will be stabilized at $50 a barrel, which is currently touted by most oil producers.
Second, oil price at $50 would call into question the profitability of shale oil production in the United States. That would drive the main rival to conventional oil out of the market for some time.
Third, implementation of the Russian-Saudi accord would pave the ground for future cooperation between Moscow and Riyadh, as they are currently at loggerheads over many regional and international issues.
Challenges to Agreement
Despite projections for a positive outcome, the Saudi-Russian agreement or even a deal between Russia and the Organization of the Petroleum Exporting Countries (OPEC) are likely not to bring about oil price hike. The reasons are as follows:
The agreement reached between Russia and Saudi Arabia is so ambiguous. This ambiguity could be seen in somewhat contradictory remarks by oil officials of the two countries. The Saudi energy minister has said that “Saudi Arabia and Russia will take advantage of their prominent status in the oil production market”. “These two countries share a motivation, i.e. bringing stability to international oil market. At present, freezing the oil output level is not on the agenda and does not seem necessary,” the Saudi minister said. But Russia’s Novak said: “We have reached agreement to cooperate for oil market stability and forecasting future developments”. These contradictory remarks by Russia and Saudi oil officials show that the Russians are supportive of stability in the oil market, while the Saudis do not envisage freezing oil output level. These official stances by Riyadh and Moscow show that the two countries do not pursue any specific and unique strategy for controlling global markets and shoring up crude oil prices.
What led Russia and Saudi Arabia to reach this agreement was economic challenges. This agreement is not viewed as rapprochement in strategic relations between the two countries. Russia and Saudi Arabia are at odds over a variety of issues including political and regional affairs.