Oil prices get boost as Iran praises Saudi plan to freeze output

Oil Drums

Iran has given a significant boost to oil prices by unexpectedly praising a plan put forward by Saudi Arabia and Russia to freeze production.

The cost of Brent crude soared by 6.7% to $34.35 as Iran gave its verbal support for a production ceiling, even though it avoided making any immediate commitment to rein in its own growing output.

“Iran backs any measures which help stabilise the market and improve the price of crude oil,” said Bijan Zanganeh, the Iranian oil minister, after meeting his counterparts from Iraq, Qatar and Venezuela.

But he did not mention any specific change in his own country’s production strategy and other officials insisted that fellow-Opec members were aware Iran needed to increase its output to help rebuild the economy after years of sanctions.

Saudi Arabia, the lead producer and power broker inside the Opec cartel, had agreed with non-Opec Russia to freeze production at January levels to counter an oil glut – but only if other major oil nations did the same.

The two countries were particularly keen to bring in Iran and Iraq, which are both Opec members, because they are both currently working hard to increase their output held back in the past by trade bars and war respectively.

The upbeat message from Iran following the meeting in Tehran contrasted with a more aggressive stance earlier.

“Asking Iran to freeze its production is illogical ... when Iran was under sanctions. some countries raised their output and they caused the drop in oil prices,” said Opec’s envoy, Mehdi Asali, ahead of the talks.

“How can they expect Iran to cooperate now and pay the price?” he said. “We have repeatedly said that Iran will increase its crude output until reaching the pre-sanctions production level.”

The chance of Iran agreeing to a Saudi deal was never high, not least given a history of enmity between the two regional rivals – most recently over Syria – as much as oil politics.

The recent execution by the Saudis of a Shia cleric inflamed already difficult relations between the two countries. Iran is traditionally a Shia-dominated country compared to Saudi where rival Sunni muslims are in the majority.

Even if Iran had agreed to follow the Saudi proposal and freeze production, there is considerable scepticism about whether this would be enough to change direction of the crude prices, which have slumped since hitting $118 in June 2014.

Analysts at Goldman Sachs said: “Such a freeze will have little impact on the oil market as proposed, while there remains high uncertainty that it even materialises, in our view.

“As a result, our oil supply and demand estimates remain unchanged and we reiterate our view that oil prices will remain volatile.”

In previous downturns, Saudi Arabia has been successful in encouraging others to cut their output. In 2001, Mexico, Norway and Russia all promised to act in concert to help raise oil prices.

Opec has traditionally taken this role itself but for the last year and a half has steadfastly refused to alter the cartel’s production targets as it seemed determined instead to drive rival US shale drillers out of business.

Reza Zandi, a Tehran-based oil analyst, told Reuters that it would be impossible for Zanganeh to agree output restraint as there was broad consensus among Iranian officials to increase output to pre-sanctions levels.

“Freezing the output is against Iran’s national and economic interests. Zanaganeh cannot accept it. The establishment has decided so.”

Despite those words, oil traders felt the positive words of support for the Saudi plan gave forward momentum to it and oil companies such as BP saw their shares rise in value by up to 4%.

Still the outlook remains uncertain and the price of Brent has been extremely volatile for weeks. Countries such as Saudi Arabia and Venezuela are desperately keen now to find a solution as their national budgets are being badly hit.

Last month Saudi Arabia revealed that it was even thinking about selling off part of its state oil company Aramco which was previously considered the country’s economic crown jewel.

British consumers have been benefiting from lower petrol and power prices but there has been 70,000 direct and indirect jobs lost as a result of the downturn in the North Sea, which is a high-cost production area.

Powered by Guardian.co.ukThis article was written by Terry Macalister Energy editor, for The Guardian on Wednesday 17th February 2016 19.26 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010


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