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What Russia and Saudi Arabia's OPEC Agreement Means

By Motley Fool Staff - Feb 24, 2016 at 1:00PM

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The two largest oil-producing nations in the world agreed to freeze production at current levels.

Last week, the world's two largest oil-producing countries, Russia and Saudi Arabia, agreed to freeze their oil production levels -- albeit at record-high levels, and with a few major caveats. The price of oil popped 5% as a result, but how much will the agreement affect the broader industry in the long term?

In this clip, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman talk about why Russia instituted the freeze, and how this should affect oil prices going forward. 

A transcript follows the video.

This podcast was recorded on Feb. 18, 2016. 

Sean O'Reilly: The other day, this seems like a half-hearted thing that they're doing, but everyone was like, OK, OPEC needs to cut production in order to get oil prices up, dadadadada, and I didn't think this was an option, but apparently it is. So, Saudi Arabia called up Russia, and they agreed to a production freeze at elevated production levels or something. Can somebody explain that to me? (laughs) 

Tyler Crowe: Yeah, that's basically it. Saudi Arabia and Russia, the two largest oil producers in the world --

O'Reilly: They're both [each] at just over 10 million barrels or something like that.

Crowe: Yeah, somewhere right around there. They've said they're willing to freeze their current output at their levels in order to help spur along the recovery. However, it's also contingent that everybody else plays along. So, they're saying, "Hey, we'll do it as long as Iran and Iraq and everybody else gets on board with it."

O'Reilly: Which seems unlikely to me.

Crowe: Yeah, seems like most of them are saying, "Hey, we love the idea of you guys freezing output!"

O'Reilly: "Why don't you do it?"

Crowe: "But you know what? We still want to bring on more production because we want more money." So, it always just seems like kind of a non-starter, at least from a long-term investor's perspective. These are just kind of those things that, when they happen, we have a 5% jump in oil prices immediately following --

O'Reilly: Yeah.

Crowe: -- because everybody got excited. "Oh, oil's back, baby!" Well, guess what? Next day, it happens, and it doesn't happen because people want to keep producing.

O'Reilly: Really quick, before we move on, it just seems weird that they were willing to freeze production at current levels. If memory serves, Saudi Arabia is over 10 million barrels per day, like 10.1 or 10.2. And even in summer 2014, before all this happened, they were at like 9.6. 

Taylor Muckerman: Well, that's the thing. Why care about freezing when you're producing at record levels? Russia produced an all-time high in 2015. So, they're like, "Sure, we'll freeze, because we probably can't produce that much more anyways."

O'Reilly: "We can't go much higher." Like ... (laughs) 

Muckerman: Right. Their currency is down over 30% just over the year, the government is strapped for cash. So these companies have no backing right now.

O'Reilly: It's kind of absurd.

Muckerman: And they raised debt in 2015 just to stay afloat and keep producing oil. So, Russia, I think, instituted this freeze out of ... because there's nothing else they can do.

O'Reilly: Yeah.

Muckerman: It's like, "Hey, maybe if we say we're going to freeze it, prices will jump, because we're freezing it anyways out of necessity, not out of desire."

O'Reilly: So, Iran came out and said they liked this idea, like Tyler was mentioning, but they were basically like, "Yeah, we're not going to freeze production." But don't they kind of have a point? Because they're trying desperately this year to get to 500,000 barrels a day. But before, in 2011 or 2012 or whatever, before all the embargo stuff and those niceties, they were at 3 or 4 million barrels a day or something.

Crowe: Yeah, they're a little ways off from where they used to be.

O'Reilly: Yeah. And that's their goal, and they kind of ... I'm not saying I like them or anything, but don't they kind of have a point there?

Crowe: They might, but at the same time, do you really want to ramp up and spend a whole lot of money when oil's at $30 a barrel?

O'Reilly: They need tens of billions of dollars to ramp up production again! I mean, they need a lot of investments.

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