Oil prices surged by 3% following a major agreement between Saudi Arabia and Russia, the world’s two largest oil producers, to cooperate in world oil markets.
News of the deal, which was signed by both nations’ energy ministers at the G20 summit in China, sent Brent crude futures for November delivery up 71 cents to $47.54 a barrel, whereas U.S. crude for October delivery spiked to $45.15.
However, the gains were pared back somewhat by revelations that the two nations would not take immediate action to limit oil output and buoy flagging world oil prices. Since the epic collapse in oil prices two years ago, oil prices have rebounded to $45 a barrel, but they are still over 50% below 2014 levels.
Saudi Arabian energy minister Khalid al-Falih noted, however, that recent gains in oil prices had offset the need for an immediate production halt. “Freezing [production levels] is one of the preferred possibilities, but it’s not necessary today,” al-Falih said, according to the BBC. “The market is getting better and we have noticed that prices reflect this [improvement].”
Detractors of the move argue that freezing production at already high levels would be a superficial maneuver that does little to ameliorate the global oil glut.
Part of what has driven the oversupply of oil and depressed oil prices has been the U.S. shale revolution, which turned the nation into a massive producer of oil and natural gas. According to Rystad Energy, U.S. oil reserves (defined as recoverable oil from existing fields and future discoveries) are currently projected to be 264 billion barrels, the largest in the world. By comparison, Russia and Saudi Arabia’s reserves total 256 billion and 212 billion barrels respectively.
U.S. oil production has also been robust, on the other hand, even though oil prices are 60% lower than their 2014-levels. While the U.S. Energy Information Administration reported that field production of crude had dropped to 8.701 million barrels a day in June 2016 (revised upwards from its previous estimate of 8.6 million barrels a day), down from its June 2015 peak of 9.61 million, many industry observers believe that U.S. oil production has bottomed out and that it is due for a resurgence. Citing growing global demand for oil spurred by developing markets, Jude Clemente, an oil analyst at Forbes, argues that global oil prices are destined for a rebound, which will in turn boost production.
Furthermore, evolving technologies have increased American oil companies’ abilities to extract greater amounts of oil while driving down production costs, making U.S. oil exports competitive abroad.