Tension Between Iran and Saudi Arabia Presents New Test for OPEC
Diplomatic crisis comes amid a sharp tumble in oil prices
LONDON—The diplomatic crisis between Saudi Arabia and Iran presents a new test for the Organization of the Petroleum Exporting Countries at a particularly challenging time for the oil-producing cartel.
The 13-nation group that controls more than a third of the world’s oil supplies has been able to function in the past even when its members were at war. Iraq and Iran sent representatives to OPEC meetings during their war in the 1980s, and Saddam Hussein’s oil officials sat at the table with representatives of Kuwait’s exiled government after Iraq invaded in 1990.
But the confrontation over Saudi Arabia’s execution of a prominent Shiite cleric, Nemer al-Nemer, could prove to be an even trickier situation for OPEC because of the sectarian anger it has unleashed across the Middle East in countries whose economies have been slammed by depressed oil prices. Saudi Arabia is primarily a Sunni Muslim country, while Iran is mostly Shiite.
Other Sunni Muslim countries, including OPEC member, the United Arab Emirates, followed Riyadh in cutting off diplomatic ties with Iran after Saudi Arabia’s embassy was set on fire by protesters in Tehran.
Meanwhile, religious and political leaders in Shiite-majority OPEC member Iraq have criticized Saudi Arabia for the execution of the cleric.
“We have not encountered a similar situation before,” said one OPEC delegate from a Persian Gulf Arab country.
The difference this time, the delegate said, was resilient American oil production, which has kept crude markets flooded and prevented OPEC from using its main tool for calming markets: regulating oil output flows. Prices have crashed by more than 60% over the past 18 months, trading at less than $38 a barrel on Monday.
Saudi Arabia and Iran—arguably the two most powerful OPEC members—were already at odds over oil-production policy.
Iran is expected to boost international exports of its crude early this year after the likely end of western sanctions over its nuclear program. At last month’s OPEC meeting in Vienna, Iranian officials called for other members to pull back production so that crude prices don’t fall further when Iranian crude comes rushing back to the global market. Saudi Arabia rejected those calls and OPEC gave up all pretense of controlling output, abandoning its production target of 30 million barrels a day. Iranian oil minister Bijan Zanganeh was visibly upset when he left the meeting.
Saudi Arabia has pumped at record levels over the past year and encouraged other members to do so as well, a strategy that diverges from its policy in the past of propping up the market with production cuts.
Saudi Arabia and Iran have negotiated coordinated action on production in the past, including in the late 1990s. Hopes for such an agreement have dimmed, analysts said.
“Before the latest development, there was a possibility that OPEC could reach an agreement or a coordinated action,” said Mohammad al-Sabban, a former senior adviser to the Saudi oil minister. Now, “Iran will refuse to coordinate on a cut and Saudi Arabia won’t compromise.”
The mood among some in Tehran was equally pessimistic over the potential damage inflicted to OPEC.
“Already, Saudi Arabia was not cooperating with Iran in the oil market,” said Roozbeh Aliabadi, managing partner at political risk and business consultancy Global Growth Advisors, which helps businesses interested in working in Iran. “Now I expect the Saudi attitude in OPEC will turn from noncooperation into confrontation with Iran.”
Ole Hansen, head of commodities strategy at Saxo Bank, said in a note Monday that Saudi Arabia, the world’s largest oil exporter, would be negotiating with a “more equal partner” as Iran ramps up production.
“This may be difficult to achieve given the current turmoil,” Mr. Hansen said.
The tumble in oil prices has put intense pressure on the oil-dependent economies of OPEC members. Last week, Riyadh disclosed a record deficit of nearly 367 billion Saudi riyals (around $98 billion) in 2015, or about 15% of gross domestic product. The kingdom expects to run a deficit of 326.2 billion riyals in 2016, as projected revenue falls to 513.8 billion riyals. The kingdom’s national oil company, Saudi Aramco, is also slashing spending.
In Iran, oil officials are facing the prospect of boosting production just as prices are tanking even more. Last week, Mr. Zanganeh said Iran’s budget for the next fiscal year starting in March assumes an average oil price of $40 per barrel, compared with $72 a barrel in 2015.
The price of Iran’s heavy crude oil had plunged below $30 per barrel in mid-December trade, according to Iran’s oil ministry.