Oil freeze can calm prices

Markets want to see that producers are in control in order to set a healthy price floor

Saudi Arabia's Oil Minister Ali al-Naimi (centre) speaks to the media following a meeting with Qatar's Energy Minister Mohammad bin Saleh al-Sada, Russia's Energy Minister Alexander Novak, and Venezuela's Oil Minister Eulogio del Pino in Doha, Qatar. Naseem Zeitoon / Reuters
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The surprise announcement that Saudi Arabia and Russia have agreed to freeze oil production at January levels will be, one hopes, good for markets and oil producers. It is also the first step towards changing the narrative about oil prices and the supply-and-demand dynamics.

Coming from two of the largest oil producers, the announcement will, in the long term, cool international markets and calm investors who have watched prices fall rapidly on the news that China’s growth is slowing. It also comes as Iran prepares to flood the market with more crude now that sanctions have been lifted. Markets don’t like uncertainty and, as such, firm announcements about production levels can begin a period of calm.

Supply and demand imbalances have not, in and of themselves, led to the plunge in crude prices. Rather, markets trade on narratives, and the perception of such imbalances have influenced the script. That is why the recent announcement is so important. To stabilise prices, the market needs to see that producers have the means to control their own destiny. It also wants to see a new storyline take hold that establishes a healthy floor for prices.

The freeze in oil production demonstrates constructive cooperation between the world’s leading oil producers and clear thinking about how to get out of the current slump. Additional cooperation between Latin American and Middle Eastern producers will continue to cool market fears about the effects of Iran’s stubborn insistence not to curb production and to sell off its massive stockpile.

Markets, especially in the US, have been eagerly awaiting announcements from major oil-producers. While prices didn’t bounce back dramatically on Tuesday’s news of the freeze, it is likely only be the first step in initiatives to return bouyancy to prices. The challenges that exist in the oil market aren’t unknown or opaque. Additional effort is needed to regain control over the trading narrative. With that, the market can be stabilized.