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2015-12-09 19:50:00

IRAN & SAUDI COMPETITION

IRAN & SAUDI COMPETITION

Differing views about who should bear the brunt of oil production cuts to lift prices forced Opec to default to its existing policy to keep on pumping last week. This has laid bare the gaping divide between Saudi Arabia and its arch rival Iran.

The war of words that has evolved, in public and private, illustrates a conflict that is only set to intensify as more Iranian barrels make their way to international markets after sanctions linked to its nuclear programme are lifted.

"Some of the Opec members believe it is better to go along with this level of production," Iran's oil minister Bijan Zanganeh said after the meeting of ministers in Vienna on Friday, in a thinly-veiled dig at Saudi Arabia. "I didn't have any other expectation."

Mr Zanganeh has been among ministers calling for action to stem the drop in oil prices that have this week collapsed to near seven-year lows. His requests, like those from Venezuela and others, have been rebuffed by the group's de facto leader and largest producer.

The kingdom's veteran oil minister Ali Al Naimi and his inner circle have made clear that Saudi Arabia will not cut its output without participation from Opec rivals Iran and Iraq, as well as non-Opec countries such as Russia. Until this time, it would continue to defend its market share and sell as much of its oil as it can.

Pressure to limit production as Iran rebuilds its oil industry after years under sanctions has not gone down well in the country, which is targeting output growth of 1m barrels a day after restrictions are lifted.

In a countermove, Mr Zanganeh has said countries that have accelerated output over the past year — Saudi Arabia has increased its production to above 10m barrels a day in 2015 — should pull back to make room for Iran's production.

Few, however, expect Saudi Arabia to be sympathetic to this suggestion. "In the whole history of Opec we have never as an organisation said we are going to leave space for another producer," said a senior Opec delegate, who cited the examples of Iraq and Nigeria.

He added that any potential output cut announced before Iran is producing back at its full capability would "not work".

"No one knows how much they can produce. What if, hypothetically, you cut 1.3m b/d and then Iran comes back next April with a million or more."

One delegate from a Gulf country added that Iran's weak financial position did not allow for it to "seek political aggrandisement".

With one eye on the resurgence of its competitors within the cartel — as Iraq increases shipments to countries such as India, and Iran prepares to resume exports to its traditional customers — Saudi Arabia has cut prices and is courting new customers in Europe and Asia.

Saudi Arabia in recent years has muscled in and the kingdom is not keen to lose volumes when it is already feeling the economic pain of low oil prices.

At the previous two meetings of Opec ministers, Mr Zanganeh had said openly there was a consensus behind the Saudi-led strategy even if privately the minister had displayed reservations.

"[Back then] prices were above $60 a barrel," said a former Opec official briefed on the meeting. This time as prices languish near $40 "there was no agreement", he said, explaining Iran's political grandstanding.

Unlike at previous meetings, Iran is also able to see its production horizon more clearly today. And it is growing more exasperated at Saudi Arabia for pumping well above what it should be.

It was expected Opec would roll over its policy as a result of the disunity. But in an rare move, the group failed to produce a figure for its formal production ceiling, signalling to the oil market the extent of the division.

"One group thought there needed to be a production ceiling which, as well as stabilising the market, would also control the current oversupply," said Mr Zanganeh, who has called for a return to quotas.

"This view was not endorsed," he said, according to Iran's state news agency, taking another sideways swipe at the kingdom.

While each side is waiting for the other to yield, the Saudis show no sign of capitulating. For them, prices can either rise sooner through co-ordinated cuts to production or later as a pullback in investment eats into global output. They are willing to wait it out.

Meanwhile, the political backdrop could not be more tense as each side backs a different horse in conflicts in Syria and Yemen.

Although Mr Zanganeh said he hopes for agreement at the next meeting, even he, in private, is aware of the reality.

"The minister often uses a Persian proverb saying 'You can wake a person who is sleeping, but not a person who is pretending to'," said the former Opec official of Iran's inability to convince Saudi Arabia of its position.

ft.com

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OPEC: BEGINNING TO REALIZE 

OPEC OIL UP 1.5 MBD 

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Tags: IRAN, SAUDI, OPEC, OIL

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