Here’s why the Saudi-Russian oil deal won’t work

“So we’ve killed OPEC”. “After fighting to end sanctions for years and finally being free of them, why Iran would choose to put sanctions on themselves by freezing their production?”

Despite wide-ranging skepticism about the chances of such a plan, “as the deal evolves the market is likely to establish a price floor, at least temporarily”, said Dominick Chirichella, an analyst at the Energy Management Institute. He said production could go as high as 15 million to 20 million barrels a day in coming years.

Analysts had expected crude inventories to climb by 3.9 million barrels to 505.9 million barrels in the week to February 12, according to a Reuters poll on Tuesday.

The closely-watched announcement came a day after four of the world’s biggest oil producers presented a surprise deal following a closed-door meeting in Doha.

The pact to freeze production marks a shift in Saudi oil policy.

After the meeting, Iran’s oil minister Bijan Zanganeh applauded the plan to restrain output.

For months, as oil prices plunged, Riyadh had refused to curb its production in an attempt to force other oil producers, especially USA shale oil producers, out of the market.

It comes after talks between Ali Al-Naimi and Russian energy minister Alexander Novak as well as delegates from Venezuela and Qatar.

Iran, the Organization of the Petroleum Exporting Countries’ fourth-largest producer, might be offered an exception as it seeks to ramp up production following the removal of sanctions over its nuclear program last month, said Ildar Davletshin, analyst at Renaissance Capital.

Still, the Iranian oil minister on Wednesday indicated that Tehran may budge – at some point – saying “this is the first step and other steps should also be taken”.

“Kuwait hopes the agreement would provide a positive atmosphere for oil prices, and for the market to regain balance, and calls on all to support stability of markets”, he said.

While oil ministers from Saudi, Russia, Qatar and Venezuela have agreed to the freeze rather than a cut in production, Iran will now decide have to decide today when it holds talks in Tehran with Iraq and other oil producing nations to state its position.

He added: “When Iran was under sanctions, some countries raised their output and they caused the drop in oil prices”.

It appears the move by Saudi Arabia and its allies to freeze oil price is a strategy to protect market share, not to stop the fall in oil price.