Iran put itself on a collision course with Saudi Arabia at this week’s OPEC meeting, rejecting a potential compromise that would allow a small oil-production increase to appease energy consumers.
“I don’t believe in this meeting we can reach an agreement,” Bijan Namdar Zanganeh, the Iranian oil minister, told reporters upon his arrival to Vienna. That suggests the gathering on Friday could end without an agreement for the first time since 2011, although OPEC also has a history of last-minute deals.
The battle in the Austrian capital will reverberate through the oil market, where prices have gyrated in recent days, and affect energy stocks and the currencies of major petroleum exporters from Brazil to Nigeria.
Oil prices surged nearly 75 per cent, touching US$80 a barrel, after the Organization of Petroleum Exporting Countries and allies such as Russia, Kazakhstan and Mexico agreed to cut production by 1.8 million barrels a day in late 2016. Benchmark Brent crude has slipped back, trading near $76 on Wednesday, as those countries discussed easing their curbs.
Saudi Arabia, under pressure from U.S. President Donald Trump, wants to unwind some of the cuts by engineering a “moderate” supply boost in the second half of the year. Russia is pushing for an even larger quota increase of 1.5 million barrels a day, although the details of its proposal suggest a smaller volume of extra oil would actually flow into the market.
Yet Iran has so far rejected any increase, including one compromise mooted in private by some OPEC officials for a 300,000-to-600,000 barrel-a-day hike in the second half of the year. “There’s no need,” Zanganeh said on Tuesday, surrounded by dozens of reporters and television crews.
Iran faces constraints on its oil exports after Trump reimposed sanctions on May 8. Estimates of the potential impact vary, but an earlier round of U.S. restrictions on the country’s crude shipments from 2012 to 2016 slashed output by about 1 million barrels a day.
The Saudi-Iran clash is the toughest diplomatic problem that the kingdom’s oil chief, Khalid Al-Falih, has faced since he was appointed two years ago. Al-Falih, who was initially expected in Vienna early on Tuesday, delayed his arrival until Wednesday.
Zanganeh said he planned to leave Vienna on Friday immediately after the OPEC meeting, without waiting for a second gathering on Saturday that will include non-members such as Russian Energy Minister Alexander Novak. The Iranian minister said on Wednesday that he’s constantly in contact with the Russians and is willing to meet with them this week.
Zanganeh did voice one position that’s shared by Russia -- that the group should stop exceeding its target for the cuts. Novak also highlighted this problem of “over-performance” in Moscow on Tuesday, telling reporters that he estimated the actual supply curbs had gone 1 million barrels a day deeper than agreed.
The Joint Technical Committee of OPEC and non-OPEC members concluded on Tuesday that, in aggregate, the 24 nations exceed their targeted reduction by 47 per cent in May, according to a person familiar with the matter. That’s equivalent to an extra 800,000 barrels a day of cuts.
OPEC has a tradition of making last-minute deals that keep the often fractious group together. Iran, in particular, has made U-turns in the past, including one instance where Russian President Vladimir Putin personally phoned his Iranian counterpart Hassan Rouhani.
Hours after Zanganeh’s comments, several OPEC delegates insisted that they still show room for a deal, saying that Tehran hadn’t completely closed the door to an agreement.
Still, Trump’s involvement could make it harder for Tehran to accept compromise. The U.S. president has tweeted twice in the last two months complaining about high oil prices and accusing OPEC of being “at it again.” The tweets have irritated several OPEC countries, notably Iran.
“OPEC is an independent organization, not an organization to receive instruction from President Trump,” Zanganeh said. “OPEC is not part of the Department of Energy of the United States.”
OPEC takes its decisions by unanimity, so an Iranian veto would leave Saudi Arabia with only the option of assembling a coalition of willing countries to bypass Tehran’s opposition. Riyadh could also act unilaterally boosting output, as it did in 2011 after a meeting ended in acrimony without a deal.
“Saudi Arabia will try to reach consensus, but if that fails I think that Riyadh won’t be constrained and they will put the barrels in the market that they deem appropriate,” said Helima Croft, chief commodities strategist at RBC Capital Market LLC.