Unconfirmed reports that Saudi Arabia has offered to cut oil output by up to 5% if Russia does the same should be taken seriously, if only because the two countries each produce around 10 million barrels per day.. The jump in the oil price on Thursday to $35 per barrel is also consistent with the forecasts of a V-shaped recovery this year. Nonetheless, economists remain sceptical that anything tangible will come of the latest calls for coordinated action.
"We do not believe that Saudi Arabia has been deliberately pursuing a strategy of flooding the world with oil to drive out higher-cost producers elsewhere. The bulk of the recent increase in OPEC supply has actually come from Iraq, reflecting improvements in local conditions. Nonetheless, to the extent that the wealthier Gulf producers are tolerating lower prices to protect market share, there are already plenty of signs that this policy is working", says Capital Economics.
The number of active drilling rigs in the US has collapsed and shale production there is now falling. What's more, despite all the headlines about how lower prices are a sign of weakness in the global economy, demand for oil accelerated in the second half of last year. This suggests that oil prices will recover further of their own accord, without the need for a deal between key producers.
There would also be major questions over compliance. Even if Saudi Arabia were ready to change tack and agree to coordinated output cuts, it is not obvious that Russia would be a reliable partner.
Even if a high level deal could be done (despite the poor relations between the two countries) it is not clear that Russia could deliver. Indeed, Russia is reported to have reneged on a similar deal in 2001. Part of the problem is that Russia is in recession and has a large number of competing oil firms who are presumably each still keen to sell as much oil as possible at almost any price. This contrasts with the relative wealth of Saudi Arabia and the near-monopoly position of Saudi Aramco. What's more, Russian companies cannot easily turn the taps off and on at this time of the year due to the harsh winter weather. Nor do they have much spare storage capacity.
"The upshot is that a sustained recovery in oil prices will have to be built on stronger foundations than comments from one or two Russian officials. Our end-2016 forecast of a rebound to $45 relies instead on cuts in non-OPEC supply, led by falls in US production, and on a further improvement in global demand. And for now, we are sticking with our forecast of $30 for the end of the current quarter", added Capital Economics.
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