The tables have been turned on Saudi Arabia, as the world’s top oil exporter has swapped its traditional role as price dove with Iran, for years OPEC’s price hawk, Bloomberg said in an article on Tuesday.
The statements of Iranian and Saudi oil ministers on Tuesday showed clinching a deal to cap crude supplies in a meeting of OPEC producers in Algiers, Algeria, is looking increasingly unlikely.
The government in Riyadh is offering a deal, including its first output cut in eight years, to boost prices; Tehran is not interested.
At the center of the reversal is their contrasting thresholds for enduring economic pain.
“Both countries are coming from different positions,” said Jason Tuvey, Middle East economist at consulting firm Capital Economics. “Iran has been under sanctions until recently, so it’s getting an economic boost as investment returns and oil output rises. Meanwhile, Saudi Arabia is facing steep fiscal cuts.”
The contrast between the two countries is stark. Iran, never as dependent on oil revenue as its neighbor, has seen prospects boosted by rapprochement with the world.
In Saudi Arabia, tentative moves toward economic reform have not prevented two years of weak prices causing financial havoc: It is burning through foreign exchange reserves, government contractors have gone unpaid and civil servants will get no bonus this year.
Freeze Deal in Limbo
Iran’s Oil Minister Bijan Namdar Zanganeh said on Tuesday that some producers are using oil as leverage to undermine other oil nations and drive their political ambitions.
“The important issue is to depoliticize the crude market and stop using oil as a weapon for every intention and under any pretext,” Zanganeh made the loosely-veiled jab at Saudi Arabia in an interview on the sidelines of the 15th International Energy Forum in Algiers.
“Oil is not a weapon and should not be used as a means of squeezing the rivals or fulfilling political objectives. It’s not our agenda to reach agreement in these two days,” Zanganeh said.
“We are here for the IEF and to have a consultative informal meeting in OPEC to exchange views. Not more.”
Saudi Minister of Energy, Industry and Mineral Resources Khalid al-Falih also played down the chances of reaching a freeze agreement. “This is a consultative meeting ... We will consult with everyone else, we will hear the views, we will hear the secretariat of OPEC and also hear from consumers.”
Stressing that Iran will support any move by OPEC and non-OPEC members to stabilize the oil market, Zanganeh said, “It is time we took effective steps to revive the quota system and turn OPEC into a strong policymaking organization it once was.”
OPEC’s decision to hold informal talks this week has fanned speculation that it might be about to deviate from a two-year-old policy of pumping without limits, which succeeded in hurting rival suppliers but also sent prices into freefall.
Iran wants to get back its pre-sanctions share of OPEC production of about 13%. The group’s 14 members pumped 33.7 million barrels of crude a day last month, meaning Iran could be targeting output as high as 4.4 million, according to data compiled by Bloomberg.
“The organization should adopt new policies so that OPEC members can maximize their profit margin,” Zanganeh said, stressing that the group does not carry its considerable clout anymore as an influential market regulator it once was. Asked about Saudi Arabia’s proposal to cut production if Iran freezes output at the current level, he said Riyadh has not yet made an official proposal.
U-Turn
Saudi Arabia led OPEC in November 2014 to defend market share, notably against US shale oil producers, at the expense of high oil prices. A month after the policy shift, Ali Al-Naimi, then Saudi oil minister, said “sooner or later” rivals would run into financial difficulties.
The kingdom had “the ability to hold out” for a long time, he boasted.
Nearly two years later—and under a different oil minister—Riyadh is now signaling it is desperate for a U-turn.
Saudi Arabia has told other OPEC members it is eager to reduce production to January levels, according to Algerian Energy Minister Noureddine Bouterfa.
That effectively would mean a cut of 500,000 barrels a day. Iran, meanwhile, is refusing to freeze its production at the current level of 3.6 million barrels a day, aiming instead to lift output to about 4 million barrels a day, the level before sanctions halved exports.
When the oil slump started, few would have anticipated that Saudi Arabia would be seeking a deal to boost prices and Iran would resist it.
“Tehran would love to have higher oil prices, but Iran is the OPEC country that had to do fewer budget sacrifices due to cheap oil,” said Olivier Jakob, an analyst at Petromatrix GmbH in Zug, Switzerland. “They feel they have a strong hand.”
