TOKYO It is rare to see ministers from Saudi Arabia and Russia together at the negotiating table, and rarer still for them to walk away with an agreement. But that is what they did when they, along with their counterparts from Venezuela and Qatar, decided in mid-February to freeze crude oil production at January levels in an attempt to stabilize plummeting oil prices. Still, unless other oil producers, particularly Iran and Iraq, join their cause, prices are unlikely to rally.
The accord between the two oil giants -- reached on Feb. 17 in the Qatari capital of Doha -- was an important show of unity. It was also an act of desperation. When OPEC member states met in November 2014, Saudi Arabia persuaded its skeptical counterparts to keep production levels unchanged despite tumbling prices. The decision sent global oil prices into a tailspin, with per barrel prices tumbling to the present level of about $30 from over $100.
At that time, Saudi Arabia was convinced that keeping the oil gushing, and therefore pressuring prices lower, would throw cold water on the shale oil boom in North America. Many OPEC members were doubtful, however, and called for a production cut. But Saudi Arabia convinced them that such a move would do little to shore up prices unless big players such as Russia agreed to join them.
Russia, meanwhile, did not trust Saudi Arabia's motives. There was speculation that Riyadh's decision to send oil prices even lower was influenced by a U.S. keen to keep the pressure on Russia, whose policy toward Ukraine had angered Washington. Also, Russia and Saudi Arabia had -- and continue to have -- different stances on the Syria conflict, with Moscow giving substantial military and economic aid to the regime of Syrian President Bashar Assad, and Riyadh backing the opposition forces in the war-torn country.
BANDING TOGETHER But over time, and as prices have sunk even further, the two sides have begun to find common ground. According to wire service reports, Saudi Arabia's net foreign assets had fallen to $608 billion at the end of January from a peak of $737 billion in 2014. That is because the country has been withdrawing money from Japanese, U.S. and European fund managers to address the erosion of its finances caused by the oil collapse. Russia is also in dire financial straits, with two major state-owned funds expected to go bust in three years. That prospect has spurred an alarmed Moscow to cut government spending by 10%.
Saudi Arabia's deputy crown prince and defense minister, Mohammed bin Salman, has visited Russia as an envoy of King Salman several times since last summer. In November, a senior Russian government official announced plans to establish a joint working group with Saudi Arabia in the energy sector. Sources close to the Saudi government said in early February that Moscow and Riyadh had gone so far as to discuss the timing of possible production cuts.
Both sides are eager to strengthen their finances. Russian President Vladimir Putin wants to increase his country's military presence in Ukraine and Syria, which will not be cheap. Saudi Arabia, meanwhile, is involved in Yemen's civil war, and securing military funding for that is a top priority for Riyadh. Moreover, the Saudi royal family has been following an expensive strategy of doling out generous benefits to the public to keep people content and avert the kind of political unrest that broke out domestically and in neighboring Arab states in 2011.
Venezuela, which is on the verge of defaulting on its debts, played the role of mediator in the four-way agreement to freeze output levels. But even with the two major producers -- which each pump more than 10 million barrels a day -- now on the same page, there is no guarantee their plan will rescue tanking oil prices. On Feb. 18, the day after the agreement was reached, the Dubai crude spot price, the main Asian benchmark, staged a rebound, with the price for April delivery climbing $2.80 from the previous day to $31.10. But there is no telling at this point if the uptrend has legs.
When it comes to projecting crude prices, it is important to know whether other oil producers are likely to join the "Doha four" in freezing output levels. Although Iran expressed support for the idea, it faces strong pressure to increase production now that Western sanctions against its energy industry have been lifted.
On Feb. 4, before the output agreement was reached, Ali Tayebnia, Iran's minister of economic affairs and finance, told the Nikkei Asian Review that the country aims to increase oil production by 1 million barrels a day. As a first step, said the minister, Tehran will steadily boost output until it has increased by half a million barrels. Then it will decide on further hikes while monitoring market trends. Market players will no doubt be examining Iran's every move.
IRAQ AND A HARD PLACE Iraq's response to the agreement is also worth watching now that the country has surpassed Iran to become OPEC's second-largest oil producer. Its current plans call for increasing production to 4 million barrels a day from the present level of 3.8 million barrels.
Observers agree that Iraq is in a tough position. The way the country sees it, with the security threat posed by the rapid spread of the Islamic State militant group across the country, Iraq needs to keep the oil money flowing in to fund purchases of weapons and strengthen its military and security forces. As such, veering from its plan to boost crude output is not a popular idea there.
In announcing the four-way agreement, Ali al-Naimi, the Saudi oil and natural resources minister, called it "the beginning of a process which we will assess in the next few months," suggesting further moves may lie ahead. But his words could also be interpreted as a means of buying time should Riyadh and Moscow fail to come up with measures -- such as a simultaneous production cut -- that help shore up prices.
Another factor that shapes oil prices is the flow of investor money. Of late, that money has fled from the oil market, sending prices lower. While much of those funds were initially being channeled into dollar-denominated financial products, fading expectations for another round of interest rate hikes in the U.S. have prompted money to flow back into the yen. Unless oil producers take bold steps to shore up oil prices, such as a coordinated production cut, that money is unlikely to find its way into the oil market again, potentially sending crude oil prices down to the $20 level.