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Upshot of Saudi Oil Freeze Agreement Doubtful

By Cina Coren
Cina Coren is a former Wall Street broker and financial advisor. She holds a Master's degree in Communications and spent many years writing for international news outlets and journalistic publications. Today, Cina spends most of her time writing internet articles and blogs, and reading various newspapers to stay on top of the news.

Despite what the recent 4-way agreement may say, Saudi Arabia has not agreed to pull back from any oil production but has agreed in theory to freeze output. Since OPEC's largest producer typically increases output in summer, a freeze could restrict crude flows to market during the summer months. But with the world’s biggest exporter already pumping near-record volumes, an agreement to freeze output would make little difference.

Oil Minister Ali Al-Naimi said the nation won't cut supply. But last week’s pledge to cap production at January levels along with Russia, Venezuela and Qatar could mean the Middle Eastern nation will desist from the typical output increase required to fuel the summer surge in domestic demand. Holding back the normal increase would amount to cutting about a quarter of the current global crude exported to markets.

Oil sank Wednesday after al-Naimi’s comments, with the benchmark Brent crude trading 2.3 percent lower at $32.52 a barrel as of 10:55 a.m. in London.

Holding back the normal increase(in oil production) would amount to cutting about a quarter of the current global crude exported to markets…

500,000 Barrels Less a Day

Saudi Arabia has averaged an additional output of about 360,000 barrels a day from January levels to the seasonal peak in June and July. Over the same period, the amount of crude the country burns to generate electricity typically rises by as much as 500,000 barrels a day as citizens turn up their air conditioning.

According to one analyst, holding supply at January levels and not increasing them when their domestic requirement for power generation is at its peak will amount to about 500,000 barrels a day less making its way to global markets. With Saudi Arabia’s production already at near-record levels, however, a dip in exports wouldn’t leave the market short.

The largest member of the Organization of Petroleum Exporting Countries intensified output last year to put pressure on U.S. shale producers and claim its territory before Iran’s return to world markets. And data has shown that it pumped 10.2 million barrels a day in January, a level that already exceeds the summer production peak in all but one of the past 10 years. The exception was 2015, when peak summer output reached a record 10.6 million barrels a day, 400,000 higher than last month’s level.

Analysts believe that the kingdom would not have to limit crude exports to meet seasonal demand this year because it has large amounts of oil in storage in addition to natural gas from the new Wasit project that could feed power generation. By employing alternative energy sources, the dip in the summer will be insignificant.

Al-Naimi said this week that t the accord is only “the beginning of the process” and that the freeze agreement will initially last only three to four months before the participants decide whether to take other steps, expiring at just about the time Saudi Arabia would typically turn on the taps. The producing countries will gather again in March to discuss the situation.

At the moment, the view among the other OPEC members is that the impact of the freeze will be limited because they were already expected to have flat production this year and that the whole agreement could turn out to be an futile attempt.

Still, other oil producers have already responded to the agreement reached by Russian, Venezuelan, Qatari and Saudi Arabia. Iraq is ready to cooperate with the output freeze and Falah Al-Amri, chairman of Iraq’s state Oil Marketing Organization said on Wednesday that OPEC members and non-OPEC nations “have to act together” to combat falling prices.

Iran's oil minister Bijan Zanganeh has called any such plan “ridiculous” and said the Islamic Republic was not willing to cede its global market share, while Qatar's energy minister Mohammed bin Saleh al-Sada said the move would help "stabilize the market".

Cina Coren
About Cina Coren
Cina Coren is a former Wall Street broker and financial advisor. She holds a Master's degree in Communications and spent many years writing for international news outlets and journalistic publications. Today, Cina spends most of her time writing internet articles and blogs, and reading various newspapers to stay on top of the news.
 

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