Business World

Thursday 22 March 2018

Saudi Arabia will only freeze its oil output if Iran does so - and it won't

The recovery in the price of oil may not be sustainable as Iran chooses to play hard ball. There's quite a way to go yet.

There will be no agreement on reducing oil output and resetting prices without Saudi Arabia coming on board
There will be no agreement on reducing oil output and resetting prices without Saudi Arabia coming on board

Grant Smith

After putting a floor under oil prices this winter, the proposed crude-production freeze appears to be headed for a spring thaw.

Burgeoning oil-producer unity, which was leading toward an accord in Doha to cap output, came under immense strain as Saudi Arabia's deputy crown prince said the kingdom's commitment depended on regional rival Iran, which has already ruled out its participation. If any producer increases output - and Iran has made clear its intention to do so - Saudi Arabia will likewise boost sales, Mohammed bin Salman said this weekend in an interview with Bloomberg.

"Kiss goodbye to any Doha accord," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. "There will be no agreement without Saudi Arabia. Why should others sign up to freeze output?"

Oil has recovered almost 50pc from the 12-year low reached in January as Saudi Arabia and Russia led the tentative agreement to freeze production in an effort to curb the global glut. The two countries, along with most OPEC members and some others outside the group, are due to meet in Doha on April 17 to finalise the pact.

While Iran will attend the talks, it has refused any limits on supply as it restores exports after international sanctions were lifted in January.

"If all countries agree to freeze production, we're ready," bin Salman said in the interview. "If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door."

Oil prices slumped after the interview was published, with West Texas Intermediate futures sliding as much as 4.2pc to $36.72 a barrel, erasing gains for the year.

Brent Crude also fell 4.2pc to $39.07 a barrel.

Saudi Arabia hadn't informed Russia that it had no plans to freeze oil output without Iran doing the same, said Russia's Energy Minister Alexander Novak in St Petersburg on Friday. It was too early to talk about any freeze for Iran within a wider OPEC-Russia deal, he said.

There had been signs that Saudi Arabia might make an exception for Iran, said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas.

"There appeared to be more conciliatory signals from Saudi Arabia," Tchilinguirian said. "These new remarks call that into question. We have returned to the earlier Saudi position, whereby a production agreement is conditional on oil producers participating."

Even if the pact is signed, it would have little impact on supplies, according to the International Energy Agency, because most of the countries involved have little capacity to increase output even if they chose to.

"It doesn't change balances one bit," said Amrita Sen, chief oil analyst at consultant Energy Aspects in London.

The Saudi deputy crown prince's comments may not be fatal for the accord, as Saudi Arabia may simply be trying to press for a stronger deal in Doha and showing resolve to a domestic audience, according to Petromatrix, a consultant in Zug, Switzerland.

"This could be part of the pre-meeting politics," said Olivier Jakob, the consultant's managing director. He said the reins of government and the seat of economic policy in the kingdom, where King Salman took the throne last year, were "less clearly defined" than before and "that can lead to headline noise going into the meeting".

Iran plans to boost crude output to 4 million barrels a day, the highest level since 2008, before it will consider joining other suppliers in seeking ways to rebalance the global oil market, Oil Minister Bijan Zanganeh said in mid- March. The previous month he had dismissed any proposal for Iran to moderate its supply growth as "ridiculous".

The Saudi push for a freeze has become "a joke," said Elham Hassanzadeh, founder of consultancy Energy Pioneers, a consultant that specialises in Iran. "Now that Iran is managing to get itself back into the market, there's almost no chance it will stop that effort."

European shares responded to the new row with fresh declines as oil companies tumbled and investors assessed the implications of better-than-expected US jobs data.

A measure of energy-related companies fell the most of the 19 industry groups on the Stoxx Europe 600 Index, with Total SA leading the retreat. In short, it was the worst quarterly start to a year since 2009 - with all but one of its constituent groups falling. The VStoxx Index, which tracks volatility expectations for euro-area stocks, advanced 5.9pc.

"The market is missing confidence," said Mathias Haege, who helps oversee €300m at MaxAlpha Assets in Frankfurt.

"At the end of the day, it doesn't matter what central banks are doing if economic growth doesn't accelerate and corporate earnings continue to shrink."

Investors are looking for indications of the trajectory of interest rates after recent mixed economic reports and Federal Reserve Chair Janet Yellen's reiteration that any increases will be gradual in light of uncertain global growth. Traders have cut the odds of an April rise to zero.

© Bloomberg

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