Talks about cutting oil output show Russians and Saudis feel the pain

Imagine for a moment that the US, EU and India announced that they were willing to freeze carbon emissions at their current level on the condition China did the same. Would anybody believe that this was a serious attempt to tackle global warming?

Unlikely, in all honesty, yet the financial markets seemed to get awfully excited on Tuesday about talks between Saudi Arabia and Russia that would limit oil output at its January level provided Iran and Iraq agree to do the same.

Let’s be clear: this is not a deal to put a floor under oil prices; it is a pretty lame attempt at hoodwinking the markets into thinking a deal has been done to put a floor under oil prices.

Related: Oil prices rise on talk of output cut

The current state of play is that both Russia, the world’s biggest producer, and Saudi Arabia, the second biggest supplier, are flooding the global market with oil. Production is at record levels and is more than enough to meet the needs of a faltering global economy.

Even if Iran agreed to limit its output, the freeze agreed by the Russians and the Saudis would do nothing to affect the mismatch between supply and demand that has been driving down the cost of oil. But there is not the slightest possibility that the Iranians – who are at loggerheads with the Saudis and who have only just been able to regain access to global oil markets after the lifting of sanctions – will fall into line, and the government in Tehran has said as much. No matter how low the oil price goes, Iran is going to be better off than it was while sanctions were in force.

oil price chart

Oil prices rose on Monday when rumours were swirling about that the clandestine talks between the Russians and the Saudis would lead to production cuts. The cost of crude came crashing down again on Tuesday when it was announced that the outcome was a freeze, and a contingent freeze at that.

Even so, the downside potential for oil may be limited. The Russian-Saudi talks show that both countries are feeling the pain from the drop in the cost of crude from $115 (£80) a barrel to just over $30 a barrel in the past 18 months. They are as yet unwilling or unable to do anything meaningful which would reverse that fall. But the pressure is mounting: they will try a bit harder next time.

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