Saudi Arabia and Russia, the world’s two most powerful oil producers, have reached a tentative agreement to freeze oil production at its current levels. As the first deal between an OPEC and non-OPEC member in 15 years, it marks a significant declaration of intent. But it is not geared toward buoying oil prices, as some might hope. Rather, it has much more to do with blocking Iran’s re-emergence as a global oil exporter.
The agreement between the two countries to keep output at January levels led to much noise of a market rally, with little to show in the way of gains. The benchmark price of Brent crude jumped briefly from $33.4 to $35.55 a barrel but it will not lead to a sustained rise in prices.
For starters, the agreement is not a cut in production levels. In January, Saudi production was sky high; significantly up from December. So the announcement of the freeze in production was part of a strategy to merely stabilize prices.
Geopolitics at Play
The story is about much more than just prices. The current state of play is that both Russia and Saudi Arabia, the number one and two oil suppliers, respectively, are trying to stop Iran from making any further inroads into the global oil market.
Saudi Arabia has always been at loggerheads with Iran when it comes to oil production—and everything else besides. It is aware that oil prices will fall further when sanctions on Iran are completely lifted. By acting now, it is hoping to pressure other major producers to follow suit, and that Iran will fall into line with the other members of OPEC.
Another concern for Saudi Arabia is losing its position as the main strategic partner of the United States to Iran, especially after failing to dissuade the United States from removing economic sanctions against Iran for its nuclear program. It is hoping to put Iran in its place by limiting the gains it can make from the uplift in economic sanctions.
