Saudi-Russia Oil Deal: What Does It Mean For The Middle East?

February 17, 2016

In each installment of “CGI Asks,” a selection of experts respond to a question about developments in Russia and the broader region. This week, we ask experts what to expect from the Russia and Saudi-led OPEC agreement to freeze oil outputs at current levels.

Sijbren de Jong, Strategic Analyst at The Hague Center for Strategic Studies


deJongThe Saudi-Russian deal does not mean a whole lot. Essentially what is agreed is a freezing of production output, i.e. not an increase nor a decrease. That means production stays at the current level. In the short-term that does not mean anything for global oil markets. What is more, the catch to the deal is that it depends on whether Iran will join. Whereas a production freeze may be beneficial in the long run to OPEC’s struggling countries (e.g., Venezuela, Nigeria), Iran has good reasons not to join. 

Iran has suffered years of sanctions and isolation, and during this time it saw its oil exports dwindle. Meanwhile, the market share that it had in Europe and Asia was scooped up by rivals such as Russia and Saudi Arabia. Tehran is eager to ramp up its production and claw back its lost market share, and as such has no incentive to join any kind of deal that limits its ability to do so. Venezuelan officials have traveled to Tehran to try and persuade Iran to join, but this is unlikely to succeed. Venezuela has been on a “begging spree” aimed at past major OPEC members to plead for production cuts. However, rather than beg, Venezuela should look at its own track record of managing its economy. That is the real reason behind its economic troubles, rather than the drop in oil prices. The same can be said about Nigeria.

Tehran is eager to ramp up its oil production and has no incentive to join any deal that limits its ability to do so.

In other words, the deal is unlikely to have any major effect given that other important players within OPEC are unlikely to join the deal. Any rapprochement between Russia and Saudi Arabia would also be difficult at this stage given they are at loggerheads over Syria–not to mention the fact that Russia has difficulties cutting production in the midst of winter due to the harsh conditions (freezing of pipes, risk of damage to wells, etc.). A ‘freezing’ (no pun intended here) of production is the best you can expect. The impact on oil prices therefore is likely to be only marginal. The fact that oil prices receded again shortly after the deal’s announcement is a good illustration.

Jean-Francois Seznec, Visiting Associate Professor at Georgetown University and Managing Partner at the Lafayette Group

SeznecShould a real cut in production by Russia and Saudi Arabia be in the offing, the impact on the Middle East economies would be substantial. Budgets will become easier to balance and investments in infrastructure will restart. Most importantly the cancellation in subsidies and the adoption of new taxes to fund the states will remain. Hence the Gulf states, especially Saudi Arabia, would have managed to modernize their economy and still maintain decent income from crude oil. It would signify the end of the rentier state as we have known it.

A deal on crude oil between two major producers won’t translate to a breakthrough on Syria.

However, the arrangement of February 16 or even a real cut may not translate into any political arrangement on Syria. A deal on crude oil between the two major world producers should be viewed as merely a mercantile arrangement to benefit the treasuries of both countries. And before we become to optimistic, we must note that the arrangement between Saudi Arabia and Russia was not a deal.

The countries merely agreed to keep production at the current level. In the present supply glut and limited demand growth, the agreement will not translate into substantial price increases, or a major political breakthrough. On the other hand, if it were to foretell a deal on a cut of 1 million b/d, with room for some Iranian increase, prices would start rising rapidly back to the $60 to $80 range.

Michael Hsueh, Commodities Research Analyst at Deutsche Bank 

HsuehOil producer negotiations in Doha on February 16 yielded little in terms of a fundamental change in either OPEC rhetoric calling for non-OPEC cooperation, or constraining market expectations of supply growth this year. Not only has talk moved from cuts to a freeze, but such a freeze comes from producers who weren’t expected to raise production materially in any case (Russia, Venezuela, Saudi Arabia and Qatar).

In addition, the Russian Oil Ministry stated that the proposed freeze would only take effect if other producers also participate, without specifying how many or which countries would be required to join the agreement. In order for such an agreement to carry more weight, it would need to include Iran, Iraq and perhaps Libya, none of which were a party to Tuesday’s negotiations.

In order for the agreement to carry more weight, it would need to include Iran, Iraq and perhaps Libya, none of which were a party to Tuesday’s negotiations.

A credible agreement to hold production flat by all OPEC members at the January level would be quite meaningful in tightening forward expectations of market balance, as it would remove the threat of incremental Iranian volumes into 2017. Although 2016 balances would remain largely in surplus without a cut, in an OPEC flat case we would expect a 2017 annual deficit of -460 kb/d instead of a surplus of +190 kb/d, including a nearly -1.0 mmb/d deficit in H2- 2017, offering the first real possibility of significant inventory drawdowns.

Perhaps the most important result of these negotiations is to lend some relevance to OPEC as an organization, as the pace of discussions has accelerated well in advance of the scheduled June OPEC meeting.  In this way it restores validity to the idea of an OPEC ‘put,’ and marginally reduces the attractiveness of short positions from this level and below.

Read Michael Hsueh’s full analysis for Deutsche Bank Markets Research: OPEC Negotiations Yield Little – 16 Feb 2016.

Brenda Shaffer, Visiting Researcher at Georgetown University and Professor in the School of Political Science, University of Haifa

ShafferThe February 16 call by the energy ministers of Russia and Saudi Arabia for an oil production freeze was a highly successful gambit that brought Moscow and Saudi Arabia three tangible benefits: a meaningful rise in the oil price; Iran appearing as the culprit for the current instability in the oil market; and reinforcement of Saudi and Russian leadership in setting producer policies.

The Russians and Saudis astutely drew conclusions from the oil market’s behavior: a number of times in the last year, the oil price has jumped in response to statements that Saudi Arabia or Russia representatives were considering a cut. For instance, when Rosneft CEO Igor Sechin merely floated on February 10 the idea of a coordinated Russian-OPEC cut in oil production, the global oil price jumped three dollars. Throughout the fall of 2015 and this winter, announcements of potential extraordinary meetings of OPEC’s leadership or of OPEC member oil ministers with Russia’s Minister of Energy gave rise to the oil price, regardless of whether those meetings took place or the lack of concrete action of the participants.

We’re seeing a new trend in which mere statements have an impact on oil price.

This trend of the past year of response of the oil market to statements is new. In the past, statements that did not affect the physical supply of oil did not have an impact on the oil price, unless there was a very “tight” oil market (when supply and demand are very close). In a very liquid (oversupplied) oil market, like today’s market, statements of this type in the past did not impact price. However, in recent months, statements and data announcements such as on the state of the economy of major consumers, like China, are moving the oil price.

Hossein Askari, Iran Professor of International Business and International Affairs at George Washington University 


AskariThere is no “deal” to be had on oil in today’s world. It is all talk. Let me explain. A deal between Russia and Saudi Arabia will not solicit the same from the other major oil producers. Sure, Saudi Arabia and Russia, who are producing at about their maximum capacity, want a freeze before Iraq increases its output and before a sanction-free Iran increases exports, attracts major investors to increase its output in damaged fields, and brings new fields online.

The Russia-Saudi deal is a pipe dream. Iran and Iraq will not agree to any freeze, and even if they say they will, they will not abide by their promise. Moreover, in the past even OPEC has not been able to limit output with each country sticking to its quota, and now the plan would be for OPEC and non-OPEC producers—a much larger number of countries—to agree. Impossible! Recall the Arab Oil Embargo of 1973-74: even in the midst of an emotional Arab commitment to do something meaningful to support their fellow Arabs, Iraq’s vociferous revolutionary government and Saudi Arabia’s principled King Faisal cheated. Iraq did not stick to its quota and Faisal quietly sold oil to the U.S. Sixth Fleet. Today the political and economic conditions are even less conducive to a successful deal.

Poor economic conditions may spark armed hostilities in the Middle East to control oil output and exports where cooperation has failed.

Saudi Arabia will not agree to anything that might favor its archenemies—Iran and Iraq. That is why it proposed a freeze and not a reduction in its output. The Al-Sauds feel that they can weather low oil prices better than can Iran and Iraq. Saudi Arabia is exporting more than Iran and Iraq combined today, and can do so for the foreseeable future, and with a population that is only about one-third that of its archenemies. If this were not enough, Saudi Arabia has financial reserves that are about four to five times those of Iran and Iraq. And Saudi Arabia has better access to international capital markets and on more favorable terms. Riyadh will not take a step that might even help Iran and Iraq. So why the agreement with Russia? Saudi Arabia wants to draw Russia closer in the aftermath of the U.S.-Iran rapprochement. Talk is cheap if it gets Russia on the Saudi side.

On the economic front, oil prices are unlikely to go beyond the $25-50 range over the next 5-7 years unless oil exporters can agree to a significant reduction in output, or if world economic growth picks up to the pace before the great recession of 2008. Neither scenario is in the cards for the next 5-7 years as oil producers cannot cooperate and deleveraging continues to moderate growth. Unfortunately, these political and economic conditions may spark armed hostilities in the Middle East to control oil output and exports where cooperation has failed. Saddam Hussein’s invasion of Kuwait was in part fueled by similar economic considerations, and in time a not too dissimilar armed conflict may occur in the region.

Alex Vatanka, Senior Fellow at The Middle East Institute and The Jamestown Foundation


VAtankaRight now the government of Iranian President Hassan Rouhani, and particularly his oil minister Bijan Zangeneh, are operating in a very tight political space at home. The moderate president and his team spent considerable political capital to reach and implement the nuclear deal with the West against often-times stiff opposition from the hardliners in the regime. The hardline critics are waiting for the Rouhani government to adopt additional controversial policies or to make mistakes, which can be used against the overall political vision of the moderate camp in Tehran by hardliners who favor the status quo. 

Oil is a sensitive topic between the Rouhani-led moderates and the hardliners in Tehran.

In this context oil is a very sensitive topic. Zangeneh’s vision for the oil industry is much disputed and he is having much difficulty in pushing ahead with his plans to attract foreign investment through a new oil contract, the Iran Petroleum Contract (IPC). On the domestic political front, Zangeneh has  vowed that Iran will quickly regain its pre-sanctions role as OPEC’s second top producer. Given this pledge, and the tight political space in which his hardline critics want him to stumble, I see it is to be very unlikely that he can abandon this plan and the promise to producing 500,000 – 1 million more barrels a day by the end of 2016. Not to pursue the regaining of lost oil market share, as has been his pledge since he came back to the oil ministry in 2013, is politically dangerous for him and his boss Rouhani. That’s why they will welcome the Russia-Saudi and any other attempts to cut back on production on the international stage but insists that other producers accept that Iran should be allowed to continue pursuing its goal of regaining its position as OPE’s No.2.


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