Oil output freeze deal a positive sign

The proposal to freeze oil output at January levels by Saudi Arabia, Russia, Venezuela and Qatar is a silver lining for the market and crude producers, as it signifies a genuine attempt to reverse sharp slide in oil prices that has pummeled economies, markets and companies.
While the deal is preliminary, it’s the first significant cooperation between OPEC and non-OPEC producers in 15 years. Indeed, the production freeze
announced in Doha on Tuesday ushers in a more ambitious and comprehensive deal in a few months’ time.
History suggests production deals are normally reached in stages, often after several earlier attempts have failed or been only partially fruitful. Though it is not yet binding, the world’s largest oil producers — Saudi Arabia and Russia — wield huge influence in the oil market. Both countries produce over 20 million barrels per day, and they seek to bring others on board to back the oil cap proposal.
This was echoed by both Saudi and Russian officials. Saudi Oil Minister Ali Al Naimi said freezing production at January levels — already near record highs — was an adequate measure and he hoped other producers would adopt the plan. Meanwhile, the Russian officials said the pact is subject to the cooperation of other countries.
They were right. Reports are pouring in that a number of countries do not object to the Doha announcement to freeze the oil output to the January level.
UAE Energy Minister Suhail bin Mohammed Faraj Faris Al Mazrouei said on Thursday that the UAE supports any initiative to freeze the oil production ceiling by consensus of the members of the Organisation of Petroleum Exporting Countries (OPEC) and Russia.
In a statement to WAM, the Minister of Energy said, “We believe that freezing of the production levels by members of OPEC and Russia will have a positive impact on balancing future demand based on the current oversupply.”
Several OPEC-member countries and others have agreed to freeze output at last January’s levels in a move to support the stability of the global
oil market.
But critics say this move would not make much impact on the prices unless the main oil producers cut the current oversupply to boost the market. Oil prices have plunged by more than 70 percent since June 2014 due to overproduction and weak demand. There are still doubts about how quickly the market will rebalance and whether prices will recover, with most observers predicting no rebalancing until the second half of 2016, 2017 or even 2018.
The deal announced in Doha is incomplete in a sense that it relies on
concessions by other countries that were not party to the agreement, and may not restrict output enough to restore the market balance. But its significance is that it is backed by the most important oil-exporting countries which are ready to go an extra mile to clinch a better deal.
In fact, questions were being raised whether OPEC members and Russia can put aside the bigger question of long-term market share to secure a
short-term boost in oil prices and revenues. Key to this is whether a deal now or later in the year can remove some of the current and expected surplus barrels from the market.
The freeze in oil production proposal would not create an immediate U-turn, but it creates a better foundation for the price recovery — may be in the second half or earlier than that.
The Doha plan is a tentative sign that major oil producers are ready more than ever before to cooperate to stabilise the prices that hurt their economies. The importance of Tuesday’s deal is that it makes an eventual broader deal more likely and address the oversupply problem.