Saudi Arabia and Russia agree to oil output cap. Will it stop price free-fall?

Saudi Arabia and Russia backed a proposal Tuesday to cap oil production at January levels. Whether their support is enough to increase oil prices or if they can work together is still unclear.

The crashing price of oil may be slowing bringing together a diverse group of oil exporting countries.

On Tuesday, following a meeting in Doha, Qatar, top oil officials from countries around the world announced a proposed freeze on oil production. The announcement came from Saudi, Russian, Qatari, and Venezuelan officials and the proposal would include both OPEC and non-OPEC countries, with a stipulation that all big oil exporters join.

The freeze would hold global oil production levels at around January’s production levels. The aim would be to stabilize and buoy oil prices.

"The reason we agreed to a potential freeze of production is simple: it is the beginning of a process which we will assess in the next few months and decide if we need other steps to stabilize and improve the market," Saudi Oil Minister Ali al-Naimi told reporters.

However, some doubt whether the freeze will be enough to stabilize falling oil prices and whether the proposal will ever be put into effect.

"Even if they do freeze production at January levels, you have still got global inventory builds which are going to weigh on prices. So whilst it's a positive step, I don't think it will have a huge impact on supply/demand balances, simply because we were oversupplied in January anyway," Energy Aspects analyst Dominic Haywood told Reuters.

For Russia, January was a record high for post-Soviet oil production. The number hit 10.88 million barrels per day in oil production, according to Radio Free Europe. Reuters likewise reported last month that Iran pushed OPEC oil production to a record high of 32.60 million barrels per day in January.

It is unclear how capping oil production levels at January's record heights would help reverse the decline in oil price. In the past 18 months, oil prices have gone from more than $90 per barrel to $29.13, on the New York Mercantile Exchange.   

The proposal also faces a range of obstacles preventing implementation, from a dissenting Iran to a historic Saudi-Russian rivalry.

The last deal between Russia and OPEC to cooperate over oil production was made in 2001. It ended shortly after Russia raised exports instead of following through with a pledge to limit production.

Saudi Arabia and Russia still remain geopolitical rivals on a range of issues. Chief among the possible trouble areas for any Russo-Saudi agreement is the Syrian civil war, where Russia is supporting current president Bashar al-Assad and Saudi Arabia has recently said it will be sending ground troops into the area to fight Islamic State troops.

Iran’s absence from the Doha meeting also puts a damper at the viability and effectiveness of the proposed oil production freeze. Iran was the second largest oil producing country in OPEC before trade sanctions hit in 2012. So far, the country has refused to any production freeze, according to Bloomberg, and plans on ramping up production as it emerges from US and EU sanctions.

"The output freeze is disappointing because it's not an outright cut, and with Iran not a part of the meeting it’s still a bit far-fetched to think this is a precursor to a future cut. Iran’s absence from the meeting means overall OPEC output should still rise," CMC Markets analyst Jasper Lawler commented in an investor note.