The oil agreement signed recently in Moscow by Saudi Arabia and Russia has certainly disciplined the global oil markets.
The agreement brought stability to the oil market and improved the oil prices to reach the current level at $58 a barrel which continues to climb steadily, perhaps until it will reach $60 by the year end.
The two biggest oil producers and exporters have finally decided to take control and manage the oil situation in a more disciplined manner. Without the involvement of Riyadh and Moscow the oil prices would continue to hover below the $40 level.
Since the Organization of Petroleum Exporting Countries (OPEC) did not succeed in forcing members to adhere to any sort of ‘cuts’ in the production quota, nothing really worked.
Moreover, it was impossible to get Russia to adhere to any production cuts, since OPEC members were always the first to ignore and violate production cuts which had their own justifications for not adhering to their signature.
The main highlight of the Saudi/Russian agreement was to go alone and remain committed to bring some order to the oil market through their initiatives, regardless of the actions of other OPEC members.
Between themselves they agreed to raise the price level to $50 and work steadily upwards until a barrel of oil fetches $60, but not more it until further notice.
Another highlight was to allow oil consumers to get into the habit of consuming more oil but at a steady level to open their aptitude within an acceptable/comfortable price range of $50 to 55 on the short term basis.
They set their sights to the $60 a barrel by the end of next year, without hurting the oil consumers because the two countries don’t want to repeat the ‘better experience’ of $100 a barrel.
They want to give the oil markets more time in times of demand and supply at a steady pace, while their overall objective is 70 a barrel in the next few years.
This strategy will lead to more diversification away from relying on oil and to invest in other resources. The privatization of Aramco by Saudi Arabia is a vivid example of moving away from oil and selling part of their oil reserves to be used in different streams of industry.
For now, the strategic oil alliance between Russia and Saudi Arabia seems to be working well, perhaps for some time and as long as oil prices are moving in the right direction, keeping everyone happy.
Moreover, for OPEC, the production cuts are apparently working well, despite most members adhering to the same agreement of 1.8 million production cuts.
By Kamel Al-Harami – Independent oil analyst