Iran-Saudi Arabia crisis punches another hole in OPEC unity

Wednesday, Jan 6, 2016,12:12 IST By metrovaartha A A A

Paris | Escalating diplomatic tensions between Iran and Saudi Arabia have added fresh strains on OPEC’s unity as the cartel grapples with a common response to rock-bottom oil prices, experts said. While it produces a third of the world’s oil, the group has struggled with crude values that have tumbled some 60 percent since mid-2014, falling below USD 40 (37 euros).

Crafting a new way forward has become yet tougher since Saudi Arabia executed prominent Shiite cleric Nimr al-Nimr at the weekend, triggering a sectarian standoff with Iran. What’s happening at the moment between Iran and Saudi Arabia makes searching for a compromise even more difficult, said Francis Perrin, president of Strategy and Energy Policy publications. Gulf countries, led by top OPEC producer Saudi Arabia, refuse to cut production unless the oil-producing states that are not members of group agree to do the same. A cut would likely help prices climb.

Though the Saudis have thus far had their way, this unbending stance has been financially painful for the 13 OPEC nations, including Algeria, Venezuela and Nigeria, which draw most of their revenues from black gold. For its part, Iran, the other pillar of OPEC, has no intention of curbing its production with the lifting of Western sanctions just on the horizon, which would allow it to resume crude oil exports. OPEC has no policy at the moment as it’s everyone for themselves, said Ole Hansen, a Saxo Bank analyst.

In the short term, there is no chance of an agreement within OPEC regarding production, and assuming there was some small chance, it has disappeared with the current crisis in relations between Saudi Arabia and Iran, said Pierre Terzian, head of the Petrostrategies weekly.

In addition to their political and religious rivalries, the two Middle Eastern powerhouses are also clashing over their share of the oil market. From Iran’s perspective, it would be fair for other OPEC members, including Saudi Arabia, to cut their production in 2016 to make some room (for Iran) without pushing prices down further, said Perrin. However, in Riyadh additional revenue means Iran will have a greater capacity to be a nuisance in the region, Perrin added.

On top of that Saudi Arabia, which has been overtaken in production by the United States, has not given a second’s thought to cutting its output. At the end of December Saudi Oil Minister Ali al-Naimi said “we no longer limit production. If there is demand, we will respond. We have the capacity to respond to demand.”

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