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ANALYSIS: Despite Russia and Saudi Arabia committing to zero production cuts in their agreement announced Tuesday, Canadian energy executives see the deal as a precursor to a major price rebound.
The world’s two largest crude oil producers, along with Venezuela and Qatar, agreed to limit their output to no more than levels achieved on January 11th this year. Together, Russia and Saudi Arabia account for more than one fifth of total global production and last month the two countries were pumping at (in Russia’s case) or near (in Saudi Arabia’s case) record levels.
Crude oil prices rallied when the surprise agreement first surfaced, only to quickly give up those gains after it became clear the pact is contingent on commitments from other major OPEC producers, Iran and Iraq in particular. Neither of those countries have expressed any desire to reverse their respective trends of production growth – Iran is still targeting growth of more than 1 million barrels per day this year – and in the meantime, most forecasts say the world is producing more than 1.5 million barrels of oil every day that it doesn’t need, keeping prices depressed.
It might sound fairly dire, but two senior Canadian oil executives see the agreement as the first sign of light at the end of the long, dark tunnel that has enveloped the global energy industry for the past 18 months.
“This agreement may ultimately be looked at as a true catalyst, in terms of setting a floor on oil,” Journey Energy CEO Alex Verge told BNN by email.
Do you think the Saudi-Russia deal will set a floor on oil prices? https://t.co/0wO5ogBcqr— BusinessNewsNetwork (@BNN) February 16, 2016
Verge gives two reasons for his optimism. First, the agreement means Saudi Arabia’s drilling of new wells will not result in any further production spikes from the Kingdom and second, there is now a clear consensus that prices are quite simply too low for everybody’s liking.
“I believe that even with the assimilation of Iran volumes, the market can return to balance within the next 12 months,” Verge said.
Michael Binnion, CEO of Calgary-based Questerre Energy Corp. and president of the Quebec Oil & Gas Association, believes Tuesday’s deal makes Russia a “de facto” member of the OPEC cartel. There are interesting political ramifications of Russia moving closer to a longtime American ally, Binnion said; but even while stressing prices are likely to remain depressed for the next few months, he interpreted the agreement positively.
“A cap on Russian and Saudi production… may give the market a psychological boost that the bottom has arrived,” Binnion said.
Slowing demand growth and stockpiles around the globe approaching capacity mean the market will need far more than a “psychological boost” to send prices meaningfully higher. Hopes are nonetheless rising that a physical boost, in the form of actual production cuts, will eventually follow this small psychological one.