Saudi-Russian freeze on oil output sets stage for more moves by OPEC

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Don't get too excited, oil buffs.

Saudi Arabia and Russia have agreed, in principle, sort of, to freeze oil production as part of a deal that is conditional on others joining in.

Freezing won't do the trick. Crude prices have skidded to levels of more than a decade ago based on the output levels that are in place now. In addition, Iran, Saudi Arabia's OPEC partner, wants back into the export game in a major way after years of sanctions, and this looks to be a gargantuan hurdle to any concerted effort.

So, there's no indication that the move, should it gain traction, will cut into the oversupply weighing on the market. Judging from the weakening of West Texas intermediate and Brent crude prices on Tuesday, the market is, at best, wary.

But, as they say, baby steps. The very notion that major producers are relenting with a declaration that supply and demand are out of whack shows an important realization – that casualties are piling up in the price war.

It raises the odds that the Organization of Petroleum Exporting Countries and others will eventually take more drastic measures, perhaps in June when the cartel's top ministers have their next gathering to discuss output policy.

The story so far: With crude prices this year having slumped below $30 (U.S.) a barrel – a level at which much of the world's oil costs more to pump to the surface than it brings in – top-producing countries are hemorrhaging red ink. In some cases, such as Venezuela, it's threatening civil unrest as public handouts that the population has grown accustomed to become too costly.

Even Saudi Arabia, the biggest market share hawk and richest member of the oil cartel, is feeling the pain as it posted a $98-billion deficit in 2015 and has promised to privatize some industries, impose new taxes and cut public subsidies so the shortfall doesn't balloon.

As for Russia, it is not an OPEC member, but it is a petro-state whose reliance on oil has turned its economy into a shambles.

What began more than a year and a half ago as a declaration by OPEC that it will cede no more market share to upstart U.S. shale oil producers and others has turned into trench warfare and ever-falling prices.

Meanwhile, crude inventories are brimming, and are set to increase even more in the coming months. In the United States, crude inventories are 20 per cent higher than they were a year ago just as the refining sector prepares to take plants off line for regular maintenance.

Exploration and production companies in Canada and the United States have slashed billions of dollars in capital spending to cope with dwindling cash flows, and that has started to translate into production declines. Still, getting to this tipping point has taken longer than many analysts had expected.

So on Tuesday, ministers from Saudi Arabia and Russia, joined by counterparts from Qatar and Venezuela, agreed to freeze production at January levels – which were near a record – but only if other major producers joined the effort.

Saudi Oil Minister Ali al-Naimi said the move is just the beginning of a longer process to study whether more meaningful moves are in order. More hard-and-fast measures would cause "gyrations" in the market and "destabilize" it, he said.

For many in Canada's energy sector, a little gyration and destabilization to the upside would be welcome, especially amid a string of financial results showing deep losses and prompting companies to slash dividends and even warn of more job cuts.

A survey of commodity forecasts among leading economists by Focus Economics pegs a consensus for Brent oil at $34.50 a barrel for the first quarter, up 8.4 per cent from last Friday's spot price, and at $48.50 for the fourth quarter, up 52 per cent. That shows expectations for a shrinking oversupply, but not wild optimism.

In fact, of the 25 economists surveyed, 10 revised their expectations down from the last poll in January and 15 left them unchanged.

So don't get giddy, but take note of the fact that there's a growing realization that the pain is widespread and that it can't last forever.