Oil Lower As Saudi Arabia and Iran Disagree About Production Output

It used to be said of OPEC that it was like a teabag – it only worked in hot water. If that is so, conditions on world oil markets could hardly be more difficult as prices languish at almost seven-year lows near $40 a barrel.

Yet, rather than closing ranks, OPEC is finding that an intensifying battle for market share, worsened by deep regional differences between Saudi Arabia and Iran, is driving it further apart.

Halfway through last Friday’s six-hour meeting, an unexpected dispute erupted over the defining feature of the cartel. In a move sources say was masterminded by Saudi Arabia, ministers finally agreed for the first time in decades to drop any reference to the 13-member group’s output ceiling.

The pivot, which surprised not only markets but also some OPEC officials, appeared to be a direct response to Saudi Arabia’s arch-rival Iran, which has made clear it intends to make a rapid return to global oil markets next year as nuclear-related sanctions are lifted.

With Tehran looking to pump as much as 1 million barrels per day (bpd) more crude into a market already saturated with excess supply, an increase of about 1 percent in world supply, maintaining or legitimizing any pretence of OPEC limits – no matter how notional – was not an option for Riyadh.

“The ceiling issue was very controversial and they could not decide on it,” said an OPEC source briefed on the discussion inside the room. “Nobody was happy.”

Via Reuters

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza