17 February 2016

The House of Saud Surrenders………

Russia and Saudi Arabil have cut a deal to limit the supply of oil.

Unfortunately, the ball is still rolling downhill:
Several top OPEC producers made headlines with Russia on Tuesday, revealing that a secret meeting between their respective energy ministers led to a deal to “freeze” production in an effort to boost oil prices.

The agreement is monumental in the sense that OPEC and Russia are poised to agree to cooperate, the first OPEC and non-OPEC deal in 15 years. At the same time, the deal is a half-measure and will likely be inadequate to substantially rescue oil prices from their rock bottom lows.


The real problem for this deal, though, is with Iran, who is unlikely to sign on to a production freeze when its output is still close to sanctions-era levels. With substantial gains in production expected for this year, the deal would be harder to swallow than it would for other OPEC members. Saudi Arabia would be willing to freeze its output if it meant burdening its rival Iran. As a result, Iran’s acquiescence is an open question. "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 told Reuters, pouring cold water on the deal. Venezuelan officials believe they can bring Iran on board, but that remains to be seen.

In short, despite Tuesday’s announcement, implementing the deal will be trickier than it sounds.
The current low oil prices are largely an artifact of a Saudi decision to overproduce in an attempt to drive more expensive fracked oil off the market.

Unfortunately for them, with interest rates being near zero, the frackers can still make payments on their loans, and now we have any number of oil producer nations who continue to overproduce because they are too dependent on oil revenues.

It's a vicious circle.


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