Saudi-Iranian row ends prospect of any OPEC deal to curb oil glut

Friday 08/01/2016
No caps. Secretary General of OPEC Abdalla Salem El-Badri of Libya speaks to journalists at the meeting of the Organization of the Petroleum Exporting Countries, OPEC, in Vienna, last December.

London - The collapse in relations between Saudi Arabia and Iran after the Saudi execu­tion of a Shia cleric ends speculation that OPEC could agree to production curbs to lift the price of oil any time soon.

A Reuters survey of Organisaton of the Petroleum Exporting Coun­tries (OPEC) production showed that Saudi Arabia ended 2015 with its output at full tilt, with no sign of cutting supply to make room for Iran, which plans to ramp up its output when international financial sanctions are lifted.

According to the survey, com­piled from shipping data, oil com­pany figures and industry experts, Saudi production for December averaged 10.15 million barrels per day (bpd). That means it was more than 10 million bpd for nine con­secutive months, the longest period of sustained production above that threshold for decades.

The determination by Saudi Ara­bia, the world’s biggest exporter, to defend its market share despite a global glut has helped drive oil pric­es to their lowest point in 11 years.

The expected lifting of sanc­tions on Iran in line with a nuclear agreement could provide the big­gest increase in supply in 2016. The world is producing 1.5 million bpd more than it is consuming and Iran is promising to add another 1 mil­lion bpd to supply over the next 12 months.

OPEC failed to agree to caps on production at its December meeting in Vienna, amid acrimony between Saudi Arabia and Iran, the Gulf re­gion’s main Sunni and Shia powers.

If there was any suggestion that the two rivals might overcome their animosity to agree to manage supply, it was buried on January 3rd when Riyadh called off diplo­matic ties with Tehran over Iran’s response to the execution of Saudi Shia cleric Nimr al-Nimr.

Several OPEC delegates told Reu­ters they saw no chance of improve­ment in relations between OPEC members, which have been already very poor for months.

“This new situation will just make it worse and I see no agreement to be reached within OPEC,” one rep­resentative to OPEC from a mem­ber country outside the Gulf region said, on condition of anonymity.

Fellow Gulf OPEC members, the United Arab Emirates and Kuwait, have backed Saudi Arabia in the diplomatic crisis that could deepen sectarian tension in the Arab world.

Iraq has volunteered to medi­ate between Saudi and Iran. Bagh­dad, with tight links to Tehran, would like to reopen an oil pipeline through Saudi Arabia, which was shuttered after the invasion of Ku­wait in the 1990s, and is unlikely to jeopardise that.

“The renewed surge in Saudi-Iran tensions could further exacerbate the ongoing fight for market share and create additional downside risks to commodity prices,” Bank of America Merrill Lynch analysts said in a note on January 4th.

Oil prices have lost two-thirds of their value since June 2014 and hit an 11-year low in December. Oil pric­es initially rose after the cleric’s as­sassination — the usual response to events heralding turmoil in the Gulf — but quickly settled back.

“There is certainly no chance of Saudi Arabia scaling back its oil supply to make space for Iranian oil,” said Carsten Fritsch, analyst at Commerzbank. “The existing over­supply may actually grow further in the short term.”

Iran has called on OPEC produc­ers, especially Saudi Arabia and Iraq, to curb supply to accommo­date its new volumes, arguing that its production was artificially cur­tailed by years of sanctions over its controversial nuclear programme.

Saudi Arabia and Iran, like other OPEC members, need higher oil prices to salvage their state budg­ets. The cartel has previously acted jointly to curb supply even when its members were at war, notably when Iran and Iraq fought in the 1980s. This time around, however, there is no sign of a deal.

Saudi Arabia has been increas­ingly willing to stand up Iran and its allies, even militarily, since King Salman bin Abdulaziz Al Saud took power in early 2015.

Riyadh in 2015 began a war to stop an Iran-allied militia seizing power in Yemen and boosted sup­port to rebels against Tehran’s ally Syrian President Bashar Assad.

While the tension between Saudi Arabia and Iran may make it harder to agree on measures to restrict oil supply, Bjarne Schieldrop at SEB Markets said the uncertainty it cre­ated could lead to prices going up.

More sectarian conflict in the Middle East could herald supply disruptions and possibly interfere with the lifting of sanctions on Iran.

“The Sunni-Shia divide has now become much deeper with possibly more intense proxy wars in Yemen and Syria. The risk picture in the Middle East has clearly inched high­er,” he said.

“While we still expect the sanc­tions to be lifted, the latest events have definitely created some last-minute risk that things may not move in the direction widely ex­pected. If the sanctions are not lifted as planned, it would clearly reduce the projected crude oil sur­plus for 2016.”