In OPEC Poker Game, Iran and Iraq Call Saudi Arabia’s Bluff

EghtesadOnline: For decades, Saudi Arabia has had its way at OPEC. All of a sudden the position has turned: Riyadh finds its power waning against a resurgent Iran and Iraq.

News ID: ۷۳۸۳۲۳

30 November 2016

As Organization of Petroleum Exporting Countries ministers gather for a meeting on Wednesday, Saudi Arabia is trying to reassert its authority by hinting it’s prepared to walk away from the negotiations. Genuine warning or bluff, Tehran and Baghdad may be willing to take the risk. Both have seen Saudi Arabia gain market share and neither is as dependent on oil prices as Riyadh, Bloomberg reported.

"Iran and Iraq have assumed that Saudi Arabia will cut unilaterally because it wanted higher prices and thought they could put the Saudis into a corner," said Amrita Sen, chief oil analyst at Energy Aspects Ltd. "Riyadh has effectively said it isn’t in a corner and will not do a deal unless everyone else contributes."

The consequences could be enormous. If oil prices rise, energy giants such as Exxon Mobil Corp. may soon be flush enough to revive abandoned projects and the finances of cash-strapped nations such as Mexico and Russia will get a boost. If not, oil’s recent rally is likely to come undone.

"If OPEC does not come up with a credible agreement to cut production on Wednesday oil prices will end the year below $40 a barrel and be chasing down $30 a barrel early next year," said David Hufton, chief executive officer of brokers PVM Group Ltd. in London.

Saudi Arabia is sticking to its same offer: cut production, but only if Iran freezes at current levels and Iraq also reduces output. Iran and Iraq are also holding to their own positions. The first wants to be able to recover to its pre-sanctions level of 4 million barrels per day and the second to freeze, rather than cut.

Nobody seemed ready to fold on Monday. A committee charged with determining where the burden of production cuts should fall met for 10 hours, but made little progress as the Saudis demanded Iran was barred from raising output any further.

Last Barrel

Both sides fought to the very last barrel: the Saudis told Tehran it needs to cap output at 3.707 million barrels a day; Tehran offered in exchange a cap at 3.975 million barrels a day. The difference, a mere 0.3 percent of global oil supply, could still scupper the deal.

Iran’s frustration was evident. In an article published on Monday by the official news service, Shana, Oil Minister Bijan Zanganeh said reviving the country’s oil output was "the national will and demand of the Iranian people." Like Libya and Nigeria, Saudi Arabia should accept Iran as a special case that’s excluded from production constraints, he said.

Together, Iran and Iraq pump more than 8 million barrels a day, up from about 6 million barrels a day from late 2014 when OPEC adopted its current pump-at-will oil policy. Saudi Arabia remains the largest producer at more than 10.5 million barrels a day.

"The reality is that only Saudi Arabia and perhaps the U.A.E. and Kuwait are prepared to make any cuts, and those will be modest and short-lived," said Bob McNally, founder of consultant Rapidan Group in Washington. “At best, Iran and Iraq will sign for production freezes.”

Perhaps with that in mind, Khalid Al-Falih, the Saudi oil minister, tried over the weekend to change the OPEC narrative. Oil prices will stabilize next year, "and this will happen without an intervention from OPEC,” he said in Dhahran, eastern Saudi Arabia, on Sunday, according to the Saudi newspaper Asharq al-Awsat.

For Saudi Arabia, it’s an unusual position: in the past, it’s approached OPEC negotiations differently. Traditionally, Saudi Arabia let another country put forward a proposal and waited to see whether others -- particularly Iran and Venezuela -- were ready to support it, showing its hand last.

This time, however, the kingdom showed its hand early in the process, signaling in the run up to the meeting in Algiers in late September that it was willing to switch from two years of produce-at-will and consider output cuts.

For both sides, the talks go beyond oil.

Deputy Crown Prince Mohammed bin Salman is trying to re-tool the Saudi economy through its modernist "Vision 2030" program and low oil prices are forcing unpopular austerity measures. In Tehran, President Hassan Rouhani faces elections in May against conservatives who believe his rapprochement with the West isn’t yielding enough economic benefits.

"The stakes are extremely high, and everyone seems to be upping the ante," said Yasser Elguindi, a veteran OPEC watcher at consultants Medley Global Advisors LLC.  "The thing with poker though is you can win even if you have a weak hand. But right now it’s hard to know who is bluffing and who is holding aces."