Saudis soften oil stance on Iran; OPEC deal still elu­sive

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OPEC might still agree an oil out­put-lim­it­ing deal later this year as the eco­nomic prob­lems of its de-facto leader Saudi Ara­bia force Riyadh to cede more ground to archri­val Iran.

Saudi En­ergy Min­is­ter Khalid al-Falih said Iran, Nige­ria and Libya would be al­lowed to pro­duce “at max­i­mum lev­els that make sense” as part of any out­put lim­its which could be set as early as the next OPEC meet­ing in Novem­ber this year.

That rep­re­sents a strat­egy shift for Riyadh, which has pre­vi­ously said it would re­duce out­put only if ev­ery other OPEC and non-OPEC pro­ducer fol­lowed suit. Iran has ar­gued it should be ex­empt from such lim­its as its pro­duc­tion re­cov­ers af­ter the lift­ing of EU sanc­tions ear­lier this year.

The Saudi and Ira­nian economies de­pend heav­ily on oil but in a post-sanc­tions en­vi­ron­ment, Iran is suf­fer­ing less pres­sure from the halv­ing in crude prices since 2014 and its econ­omy could ex­pand by al­most 4 per­cent this year, ac­cord­ing to the In­ter­na­tional Mone­tary Fund.

Riyadh, on the other hand, faces a sec­ond year of bud­get deficits af­ter a record gap of $98 bil­lion last year, a stag­nat­ing econ­omy and is be­ing forced to cut the salaries of govern­ment em­ploy­ees.

“Does the salary cut in­di­cate the Saudis are ready for a fight or does it in­di­cate that they are ready for a deal,” said an OPEC source from a Mid­dle East­ern pro­ducer, when asked about the Saudi shift.

Ira­nian Oil Min­is­ter Bi­jan Zan­ganeh said talks about a deal to cap out­put were on­go­ing. OPEC will hold an in­for­mal meet­ing, fol­low­ing by a for­mal, reg­u­lar gath­er­ing on Novem­ber 30, 2016.

Oil prices were up around 1.5 per­cent, with Brent crude near­ing $47 per bar­rel by 1125 GMT. Saudi Ara­bia is by far the largest OPEC pro­ducer with out­put of more than 10.7 mil­lion bar­rels per day (bpd), on par with Rus­sia and the United States. To­gether, the three largest global pro­duc­ers ex­tract a third of the world´s oil. Iran´s pro­duc­tion has been stag­nant at 3.6 mil­lion bpd in the past three months, close to pre-sanc­tions lev­els although Tehran says it wants to ramp up out­put to more than 4 mil­lion bpd when for­eign in­vest­ments in its fields kick in.

“Iran is not los­ing as much as Saudi. They are in a stronger po­si­tion,” an OPEC source said when asked about the shift­ing dy­namic within OPEC.

Saudi oil rev­enue has halved over the past two years, forc­ing Riyadh to liq­ui­date bil­lions of dol­lars of over­seas as­sets ev­ery month to pay bills and cut do­mes­tic fuel and util­ity sub­si­dies last year.

''The Ira­ni­ans have lived with a very tough macro back­drop for many years, and are not used to the govern­ment´s benev­o­lence - whether sub­si­dies, em­ploy­ment or spend­ing con­tracts - in the man­ner the Saudis are,” said Raza Agha, chief Mid­dle East econ­o­mist at in­vest­ment bank VTB Cap­i­tal.

“So a sus­tained drop in oil prices has a more dif­fi­cult so­cial im­pact on Saudi. “How­ever, with un­em­ploy­ment in dou­ble dig­its, Tehran is also fac­ing calls to max­imise oil rev­enues and Pres­i­dent Has­san Rouhani is un­der pres­sure from con­ser­va­tive op­po­nents to de­liver a faster eco­nomic re­cov­ery.

“The na­tion is still grap­pling with the sanc­tions over­hang and an in­abil­ity to cre­ate the jobs it needs, on top of longert­erm struc­tural is­sues,” said Emad Mostaque, strate­gist at Lon­don-based con­sul­tancy Ec­strat. Iran´s Zan­ganeh said OPEC would try to reach a deal by Novem­ber, rul­ing out a com­pro­mise to ad­dress the glut.

At $45 per bar­rel, oil prices are well be­low the bud­get re­quire­ments of most OPEC na­tions. But at­tempts to reach an out­put deal have also been com­pli­cated by po­lit­i­cal ri­valry be­tween Iran and Saudi Ara­bia, which are fight­ing sev­eral proxy-wars in the Mid­dle East, in­clud­ing in Syria and Ye­men.

OPEC sources have said Saudi Ara­bia of­fered to re­duce its out­put from sum­mer peaks of 10.7 mil­lion bpd to around 10.2 mil­lion if Iran agreed to freeze pro­duc­tion at around cur­rent lev­els of 3.6-3.7 mil­lion bpd.

For Gary Ross, a vet­eran OPEC watcher and founder of U.S.-based think tank PIRA, the of­fer was clearly un­ac­cept­able for Iran given that the Saudis have raised pro­duc­tion steeply in re­cent years to com­pete for mar­ket share with U.S. shale pro­duc­tion while Iran´s out­put was lim­ited by sanc­tions.

“Given the anti-Ira­nian sen­ti­ment in the king­dom, it is very dif­fi­cult for Saudi Ara­bia to do any­thing in OPEC which looks too ben­e­fi­cial to Iran,” Ross said.

“The salary cut high­lights the ur­gency of the na­tional trans­for­ma­tion plan. If the Saudis did some­thing ag­gres­sive to oil prices at this time, it would go against this ur­gency. “Falih said he saw no need for sig­nif­i­cant out­put cuts as the mar­ket was re­bal­anc­ing it­self. He added that Saudi Ara­bia was in­vest­ing in ad­di­tional spare ca­pac­ity and could with­stand the cur­rent trend in oil prices.

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