Global deal to cap oil output will hinge on Iran

The world’s two biggest oil exporters have promised to cap their oil production near record levels as long as other nations join them in the effort to ease a ruinous oil downturn.

The agreement an- nounced Tuesday between Saudi Arabia and Russia is the first truce in a global oil-market rivalry that has dragged on for more than a year and a half. If a cap on oil production took hold, it could lead to talks of a production cut — widely considered to be the first step toward a price recovery that would bring financial relief to Houston’s beleaguered crop of oil and gas companies.

But conventional wisdom is that Iran will balk at the offer, possibly leaving the deal in shambles. Iran has just restarted shipping crude to Europe and Asia after more than three years of international sanctions.

“OPEC can’t hammer out a deal on cuts until Iran tests the limits of what it can produce and export now that sanctions are gone,” said Matt Reed, vice president of Foreign Reports, a Washington, D.C.-based consulting firm focused on Mideast oil politics.

The tentative agreement, which included Qatar and Venezuela, failed to impress oil markets. After an initial rally, the global

oil benchmark sank 9 percent during trading on Tuesday.

Analysts say freezing crude production probably won’t do much to boost oil prices this year because it leaves the oil market with the original oversupply that has kept crude prices low for more than a year.

“It’s a whole lot of nothing,” said Mike Wittner, managing director and global head of oil research at French bank Société Générale. “The only constructive thing markets can take from this is at least they’re talking to each other.”

Speculators had bid up oil prices for weeks amid calls for a production cut by Russia, Venezuela and others. News of a proposed cap did little to move the markets. U.S. crude dropped 40 cents to $29.04 a barrel on the New York Mercantile Exchange. Global benchmark Brent fell $1.21 to $32.18 a barrel on the ICE Fu- tures Europe.

Last year, the financial stress from low oil prices forced Iran to negotiate a historic nuclear deal with the United States and other western powers, but so far Iran has signaled it will resist calls to freeze its production. It has already undercut Saudi Arabia’s oil prices in European markets.

Iran stands firm on quota

“Iran will not overlook its quota,” Iranian Petroleum Minister Bijan Zanganeh told Iran’s Shana news agency. Zanganeh is holding a meeting with the oil ministers of Venezuela and Iraq on Wednesday, and said the agreement “requires discussion and examination to be seen what has been their point.”

Despite a global production glut of 1 million barrels a day, Iran is moving to boost its output by 500,000 barrels a day in coming months. A production freeze would work against Iran the most because it would allow the crude oversupply to remain while other exporters, including Russia and Saudi Arabia, maintain their output near record levels.

“The longstanding Iranian position is any OPEC quota needs to accommodate their right to resume what they contend is their share of export volumes,” said Cliff Kupchan, chairman at the consulting firm Eurasia Group. “Cutting from 50 percent below pre-sanction levels is understandably a non-starter for Iran.”

At the very least, analysts noted, the Saudi-Russia proposal to freeze oil production at January levels has opened a line of communication between the rivals.

“Even if it’s just a symbolic move, this is the first time that we’ve had a group of sovereign producers collectively come together to take some concerted action,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.

Meanwhile, OPEC

leaders will meet again in Vienna in June to discuss oil production quotas, but the 13 members of the Organization of Petroleum Exporting Countries often fall into disputes over accountability, among other issues. If OPEC can’t agree to a production cut, the original hardliners — Saudi Arabia — can blame Iran for the ongoing downturn devastating the group.

“What if it all goes south? You blame your regional rival for it,” Croft said. “It puts everything back on the Iranians.”

Rising bankruptcy risk

The longer it takes OPEC to decide whether to cut production, the more damage done to U.S. producers struggling to pay off the high amounts of debt taken out to fuel the domestic shale oil boom. More than a third of the world’s oil producers — about 175 companies — are at risk of slipping into bankruptcy, according to accounting firm Deloitte.

OPEC believes producers out- side the cartel will cut production by 700,000 barrels a day this year, which could help rebalance the production glut later this year. Saudi Arabia has resisted cuts because it could lead to a price spike that would allow Texas and other U.S. shale producers to keep pumping more oil.

Despite Tuesday’s announcement, the global oil market will be heavily oversupplied in 2016 even if OPEC and Russia freeze production levels, according to the International Energy Agency in Paris. And Iran will likely remain on its current path to export and production growth.

“There is no significant change in the volumes of oil that will actually appear on the market,” said Neil Atkinson, head of oil industry and markets division at IEA.