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Saudi Arabia and Russia are on the right track to stabilizing oil prices

February 17, 21:31 UTC+3 Alexandrova Lyudmila
© AP Photo/Jae C. Hong

MOSCOW, February 17. /TASS/.The agreements reached by Russia, Saudi Arabia and some member-states of the Organization of the Petroleum Exporting Countries (OPEC) on freezing oil output at the level of January this year are generally positive for the prospect of stabilizing oil prices, although the market has responded negatively to the news, Russian experts say.

In their opinion, Iran, which is going to recapture its oil market share held before it was slapped with sanctions, is the main stumbling block on the way of reaching further price-stabilizing agreements.

Russia, Saudi Arabia, Qatar and Venezuela are ready to freeze oil production at the January level. However, this plan can be carried through only on condition that similar steps are taken by the other OPEC member-states, Russian Energy Minister Alexander Novak said after a meeting with representatives of the three OPEC countries in Qatar on Tuesday.

However, the meeting’s results reported by the media caused a drop in oil prices that fell even below the previous day’s close.

"As for the market’s reaction, everyone expected that oil output cuts would be announced," leading researcher at the Russian Institute of Strategic Studies Vladimir Blinkov told TASS. "The point is that global oil production exceeds demand by some 2 million barrels a day now."

‘In principle, the Doha accords are important as the first step," he noted.

"Until now, the problem was that we couldn’t even organize a proper dialog with Saudi Arabia. We have started it now after all, which is important. Even the question of whether all the other OPEC countries will observe this deal is not that important: all the same, this will quite probably be observed by Russia and Saudi Arabia because both countries are at the peak of their oil production. It is difficult to further build it up and there is no sense in it," the expert said.

However, Iran is the main problem in this whole story, he added. "It has announced that it will be seeking to regain its share, i.e. the market share it held before the sanctions rather than the volume of oil supplies. It will be difficult to agree with Iran. If it sticks to its position, Russia, Saudi Arabia and other countries will have somehow to agree already on oil output cuts. Oil reservoirs in many countries have been almost filled up and an agreement will have to be reached after all. Otherwise, oil prices will fall to extremely low levels," the expert said.

"US shale producers will be the first to falter," Blinkov said.

"They have long been trying to keep afloat and survive somehow but there is no sense for them at current prices to build up output and they will start to reduce it. And if we [Russia] and Saudi Arabia also cut it a little, the situation will improve," the expert said.

This does not mean any sacrifices for Russia, he added. "We have never extracted as much oil as we’re doing now. And if prices remain the same, oil production in Russia will decrease, irrespective of the agreements reached. This is because it is necessary to drill further to extract the same volumes, i.e. investments are needed. Our oil producers LUKoil and Surgutneftegaz have already announced that they will slightly cut output, if the prices fall."

"The negotiating process has got off the ground, which is a big advantage. Now it is necessary to ensure that this process proceeds gradually and is not halted. We’ll be forced to come to agreement. All will stick to their positions but common sense will take the upper hand after all. Today oil prices may change significantly, depending on news. But chances exist that the price will stabilize at the level of $40-50 per barrel by the end of the year," the expert noted.

"Consultations are always useful, although Saudis and OPEC as a whole are rivals for Russia," Analytical Department Head at the National Energy Security Fund Alexander Pasechnik told TASS.

"It is true that the expectations were excessive from the outset: the talk about mutual cuts by Russia and Saudi Arabia - and a 5% reduction was discussed - is still unrealistic. Hence the market’s reaction," the expert said.

According to the expert, Iran "is trying to recapture its pre-sanction share while Saudi Arabia is not backing away and they have to offer oil at dumping prices." "Competition in dumping prices on a falling market is what we see," the expert said.

According to the expert, the oil price will follow the rules of the financial market rather than the demand and supply ratio.

"Output cuts may follow because the investment base will decline, output will decrease and surplus volumes will be gone rather than because someone has come to agreement. Prices may stabilize due to natural economic processes," he said.

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