Oil politics: Saudi and Iran take opposite position on OPEC oil output targets

By Dr. Abdul Ruff

Saudi and Iran, even while fighting each other in order for dominating the West Asia region, seem to have decided to take their fight forward regarding effecting  changes in oil output targets.

The Organization of the Petroleum Exporting Countries (OPEC) is one of the forums where both could coordinate their action to stabilize West Asia. But unfortunately they continue to orchestrate their enmity even there.  Tensions between the Sunni-led kingdom and the Shi’a Islamic Republic have been the highlights of several previous OPEC meetings, including in December 2015 when the group failed to agree on a formal output target for the first time in years. This time around, strains were less acute, however, as new Saudi Energy Minister Khalid al-Falih showed Riyadh wanted to be more conciliatory and his Iranian peer Bijan Zanganeh kept his criticism of Riyadh to an unusual minimum.

OPEC is pumping 32.5 million barrels per day (bpd), which would give Iran a quota of 4.7 million bpd – well above its current output of 3.8 million, according to Tehran’s estimates, and 3.5 million, based on market estimates.

OPEC set for another showdown between rivals Saudi Arabia and Iran when it met on June 02 in Vienna with Riyadh trying to revive coordinated action and set formal oil output target but Tehran rejecting the idea.  The Gulf Cooperation Council sought coordinated action at the meeting, a senior OPEC source said, referring to a group combining OPEC’s biggest producer Saudi Arabia and its Gulf allies Qatar, Kuwait and the United Arab Emirates. In a rare compromise, OPEC also decided unanimously to appoint Nigeria’s

Saudi Arabia and its Gulf allies had tried to propose OPEC set a new collective ceiling in an attempt to repair the group’s waning importance. But Thursday’s meeting ended with no new policy or ceiling amid resistance from Iran.

Since Saudi is eager to maintain the conflict with Iran for some obscure reasons, any agreement between Riyadh and Tehran would be seen as a big surprise by the market, which in the past two years has grown increasingly used to clashes between the political foes as they fight proxy wars in Syria and Yemen. Saudi Arabia effectively scuppered plans for a global production freeze – aimed at stabilizing oil markets – in April. It said then that it would join the deal, which would also have involved non-OPEC Russia, only if Iran agreed to freeze output.

Several OPEC sources said Saudi Arabia and its Gulf allies would propose to set a new collective ceiling in an attempt to repair OPEC’s waning importance and end a market-share battle that has sapped prices and cut investment. New Saudi Energy Minister Khalid al-Falih was the first OPEC minister to arrive in Vienna this week, signaling he takes the organization seriously despite fears among fellow members that Riyadh is no longer keen to have OPEC set output. “There could be shorter-term situations in which, in our view, OPEC might intervene and yet other situations — such as long-term growth of marginal barrels — in which case it should not,” Falih told Argus Media ahead of the meeting.

At its previous meeting in December 2015, OPEC failed to set any production policy including a formal output ceiling, effectively allowing its 13 members to pump at will in an already oversupplied market. As a result, prices crashed to $27 per barrel in January, their lowest in over a decade, but have since recovered to around $50 due to global supply outages. Those include declining output from U.S. shale producers badly hit by low prices but also forest fires in Canada, militant attacks on pipelines in OPEC member Nigeria and declining output in Venezuela, also a member of the group.

Until December 2015, OPEC had a ceiling of 30 million barrels per day (bpd) – in place since December 2011, although it effectively abandoned individual production quotas years ago. OPEC currently produces around 32.5 million bpd. Any ceiling below that number would represent an effective cut. “One of our main ideas (is) to have a country quota. But I don’t believe at this meeting we can reach agreement for this,” Zanganeh said, adding that Iran was producing 3.8 million bpd and would soon reach pre-sanctions levels of 4 million bpd.

Tehran has been the main stumbling block for the OPEC (Organization of the Petroleum Exporting Countries) to agree on output policy over the past year as the country boosted supplies despite calls from other members for a production freeze. Tehran argues it should be allowed to raise production to levels seen before the imposition of now-ended Western sanctions over Iran’s nuclear program.  Iranian Oil Minister Bijan Zanganeh said Tehran would not support any new collective output ceiling and wanted the debate to focus on the more radical idea of individual country production quotas. “An output ceiling has no benefit to us,” Zanganeh told reporters upon arriving in Vienna late on Wednesday and before seeing any fellow OPEC ministers.

The market has grown increasingly used to OPEC clashes over the past two years as political foes Riyadh and Tehran fight proxy wars in Syria and Yemen. Saudi Arabia effectively scuppered plans for a global production freeze – aimed at stabilizing oil markets – in April in the Qatari capital of Doha. It said then that it would join the deal, which would also have involved non-OPEC Russia, only if Iran agreed to freeze output.

Tehran argues it should be allowed to raise production to levels seen before the imposition of now-ended Western sanctions over Iran’s nuclear program. Zanganeh said Tehran would not support any new collective output ceiling and wanted the debate to focus on individual-country production quotas, effectively abandoned by OPEC years ago. “Without country quotas, OPEC cannot control anything,” Zanganeh told reporters. He insisted Tehran deserved a quota – based on historic output levels – of 14.5 percent of OPEC’s overall production.

Understandably, OPEC failed to agree a clear oil-output strategy as Iran insisted on steeply raising its own production, though Tehran’s arch-rival Saudi Arabia promised not to flood the market and sought to mend fences within the organization.

Since OPEC failed to agree any policy, it would again convince the market that its main members could try to raise supplies further to gain market share despite low prices. UAE Oil Minister Suhail bin Mohammed al-Mazroui said oil markets were still not close to rebalancing due to a severe glut and a further price correction was possible. The Venezuelan energy minister Eulogio Del Pino also warned that supply outages have propped up prices in recent months but a global oil glut might build up again when missing barrels return. “More than 3 million barrels are out of the market. When those circumstances are removed from the market, what’s going to happen?” he asked reporters in Vienna.

Despite the setback, Saudi Arabia moved to soothe market fears that failure to reach any deal would prompt OPEC’s largest producer, already pumping near record highs, to raise production further to punish rivals and gain additional market share. “We will be very gentle in our approach and make sure we don’t shock the market in any way,” Falih told reporters. “There is no reason to expect that Saudi Arabia is going to go on a flooding campaign,” Falih said when asked whether Saudi Arabia could accelerate production.

That OPEC could not agree on a benign deal is a sign that political differences are undermining the organization, said Gary Ross, founder of US-based PIRA consultancy. “It is bearish short-term for oil prices. But what is also important is that Saudis are not planning to flood the market,” Ross added.

Zanganeh made a few conciliatory remarks, saying he was happy with the meeting and received no signals from other producers that they planned to increase output.  Sources say, after the Doha debacle, it actually restores market confidence that Saudi Arabia is committed to OPEC. This is a success compared to three days ago when people had been expecting Falih to walk out of the OPEC room.

The flow of drilling mud is seen in a container while an oilfield worker works on a drilling rig at an oil well operated by Venezuela’s state oil company PDVSA, in the oil rich Orinoco belt, near Cabrutica at the state of Anzoategui April 16, 2015.

At its previous meeting in December 2015, OPEC effectively allowed its 13 members to pump at will. As a result, prices crashed to $27 per barrel in January, their lowest in over a decade, but have since recovered to around $50 due to global supply outages. Last week, Brent prices were down 1.5 percent at $49 per barrel after the OPEC meeting but later rallied on data showing a weekly drawdown in U.S. crude stockpiles.

Traditional rivals, Saudi Arabia and Iran, continue to fight to prove their supremacy in OPEC. Neither gives up an opportunity to hurt the other, whenever and wherever they can, and oil seems to be their favorite playground. With Saudi Arabia scuttling any chances of a production freeze in Doha in April, Iran has followed suit by thwarting attempts by Saudi Arabia to introduce a production ceiling on OPEC production in last week’s meeting held in Vienna.

Iran, which is close to its pre-sanction levels of production, had earlier agreed to discuss being part of any production freeze after it reached its desired output. However, Iran refused to adhere to any production ceiling, which led to OPEC abandoning the idea.

Iran has been a dark horse since the lifting of sanctions, increasing its market share quickly to the surprise of many investors. Iran has resorted to offering large discounts to its Asian customers, undercutting the Saudi and Iraqi prices to levels not seen since 2007-2008 in order to regain their market share. Iran shipped 2.3 million barrels per day in April 2016, the highest level since 2012. These figures are 15 percent higher than the International Energy Agency (IEA) forecast. Iran has been successful in its strategy until now, but increasing its market share further might prove difficult.

Meanwhile, Saudi Arabia is attempting to cement its market share in the wake of this increased production from Iran and Iraq. Though Saudi Arabia is attempting to transition away from being an oil-dependent economy, its transformation depends on the successful listing of Saudi Aramco. As part of its preparation for the listing, Aramco is gaining market share and improving its efficiency, according to its chief executive, Amin Nasser. “We are preserving our market share, which continues to increase year-on-year,” he said in the interview. “This year, as last year, it is increasing. Our market share is picking up,” he added, without giving figures, reports Reuters.

Ian Bremmer, the president of political risk consultancy Eurasia Group, told Reutersthat the Saudi’s looked set to increase production after speaking with executives and a member of the Saudi ruling family.

Iran is better equipped to cope with the long-term upheaval because it is less dependent on oil than Saudi Arabia, having raised more through general taxation than through oil duties last year.

The struggle for supremacy between the two West Asian nations doesn’t show any signs of abating, and there is no clear winner in this showdown. Though Saudi Arabia has large reserves, it is burning them at a fast rate. On the other hand, experts believe that the Iranian economy is better equipped to withstand lower oil prices because its economy is more diversified and has an educated and hardworking population. The fight between the two for supremacy in the Middle East region is unlikely to end anytime soon. Currently, supply outages to the tune of 3.5 million b/d are supporting the oil prices by creating a balance between demand and supply.

Once Nigeria, Libya, and Canada resume pumping at their normal levels, the effects of the struggle between Iran and Saudi Arabia will be felt. If both increase production, the world will be awash with oil, pulling prices back to the mid $30/barrel levels.

But then the new oil importers could also play oil politics along with OPEC.