Did Saudi Blink? -- February 16, 2016

Updates

Later, 12:20 p.m. Central Time: Bloomberg says "this" doesn't change anything. The article concludes:

If the intention is real, it may signal panic in OPEC's ranks that a resurgent Iran

-- whose own relations with Saudi Arabia could charitably be described as frozen

-- is about to make a terrible situation a whole lot worse.

Now, back to the article, from the beginning. With regard to the "agreement,"

Written another way, you could say that four large oil producing countries just confirmed that they won't cut output, which was the same situation that prevailed last week, before oil prices rallied on news of talks between OPEC members and Russia.

The writer says the "freeze" faces three big problems:

• things will get worse, with or without Iran adding more production to the current global glut
• Saudi Arabia is on the cusp of ensuring its market share; US producers almost ready to go under; does the "freeze" throw them a lifeline?
• global oil demand is off to a shaky start in 2016 

This is how I see it: a) nothing changes; b) Saudi Arabia throws a bone to the chihuahuas in OPEC; c) it enhances Saudi's image as a deal-maker; d) it allows Saudi to test the waters (how the global investment market reacts); and, e) allows the Saudis an opportunity to "save face" if changes are necessary (in either direction.

Original Post

 

I think the second sentence says it all, "albeit hardly concrete." In fact, it's not a "deal" at all, except to say that production will freeze if "everyone" agrees.

In a sign of tentative cooperation among major oil producers, Qatar, Russia, Saudi Arabia and Venezuela announced a plan on Tuesday to freeze output at current levels, a move intended to help bolster energy prices.

The plan, albeit hardly concrete, reflects the troubled state of the oil industry.

With prices having recently slipped to new lows, major oil producers, particularly in the Organization of the Petroleum Exporting Countries, are trying to calm the markets with talk of a deal. But the proposal gives countries a potential out, a big reason oil prices gave up their initial gains on Tuesday.

While speculation focused for months on production cuts, the talk now centers on holding production steady. Even that would be helpful in a market where countries have been steadily ramping up production to record levels.

The plan represents a reversal for Saudi Arabia. As oil prices have slumped, the country, the de facto leader of OPEC, has avoided trying to manage the market through cuts, or even talking of them. Instead, it has continued to ramp up production, even as prices dropped sharply.

It is also symbolic that Saudi Arabia and Russia are now presenting a united front on oil. The two countries are geopolitical rivals, backing opposite sides in the Syrian civil war.

While major oil-producing countries have been floating ideas to the markets for months, divisions are heating up, as oil prices flirt with $30 a barrel.

Venezuela has been especially vocal about managing production. The country’s economy, which is critically linked to the prices of oil, is in disarray and its leadership has little financial backup.

Now, it appears to be getting support from Saudi Arabia and Russia. While such big players are feeling the pain, they are in better shape, making it easier to weather the price weakness.

But the producers are not committing to a deal, highlighting the difficulty of the process. The four countries said they would freeze their output at January levels only if other major exporters did the same — and that is hardly an easy sell.

Well, we know that's not going to happen.

Since 1998, OPEC has "cheated" on production ceilings/quotas almost continuously. There have only been two (very inconsequential) 'moments' in which OPEC has not exceeded their production ceilings since 1998.

Did Saudi blink? Perhaps a smirk.