Oil Slides As Iran Turns Down Saudi Offer

iran-rejects-saudi-cut-offerThe Saudi “cut” offer that rallied crude yesterday was nothing but a strawman to enable them to pinpoint blame on Iran for the failure of talks. Unwilling to freeze its output – even based on the ‘offer’ of Saudi cuts – Iran’s Bijan Zanganeh exclaimed “it’s not our agenda to reach agreement in these two days,” blowing a hole in the hope train for crude’s recovery.

Iran wants to raise its crude production to 4 million barrels a day, Bijan Namdar Zanganeh said in an interview Tuesday. OPEC’s third-largest producer – with daily output of 3.6 million barrels last month – will talk to other members at the International Energy Forum in the Algerian capital and it’s possible the group could reach a formal supply deal at its November meeting in Vienna, he said.

 

“It’s not our agenda to reach agreement in these two days,” Zanganeh said. “We are here for the IEF and to have a consultative informal meeting in OPEC to exchange views. Not more.”

OPEC’s decision to hold informal talks this week has fanned speculation that it might be about to deviate from a two-year-old policy of pumping without limits, which succeeded in hurting rival suppliers but also sent prices into free-fall. Ministers from member countries arriving in Algiers have downplayed the prospect of a deal. Iran rejected Saudi Arabia’s offer last week to cut its own production if Iran capped output at current levels.

Iran, never as dependent on oil revenue as its Gulf neighbour, has seen its prospects boosted by rapprochement with the West that removed sanctions on oil exports in January.

As the chart below illustrates, the majority of Iranian crude loadings are heading to four countries. China is the largest recipient, followed by India, South Korea and Japan. These four Asian nations accounted for nearly three-quarters of Iranian crude exports in the first half of the year.

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Cost-cutting amid increasing efficiencies have dragged down the break-even prices for oil – now putting US shale in the mix with Nigeria, Venezuela, Brazil and Angola at a range of $40 – $65 per barrel. The most impressive statistic in terms of increasing efficiencies comes from oil services provider, Halliburton, who has helped Eclipse Resources drill the longest shale well on record – 26,641 feet deep, and another 18,544 feet long.

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Meanwhile in Saudi Arabia, tentative moves toward economic reform haven’t prevented two years of weak prices causing financial havoc: it’s burning through foreign-exchange reserves, government contractors have gone unpaid and civil servants will get no bonus this year.

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In an attempt to hold face, Saudi Minister of Energy and Industry Khalid Al-Falih told reporters Tuesday that the oil market is trending in the right direction, with inventories shrinking as supply and demand have converged. The Saudi economy is doing very well, he said.

 

Analysts say the longstanding political rivalry between Saudi Arabia and Iran remains a core hindrance to any potential deal at Algeria.

“There is really no hope of any agreement when Iran and Saudi Arabia don’t agree,” said Alan Oster, chief economist at National Australia Bank.

By the time OPEC’s scheduled 30 November meeting rolls around, Iran should be closer to its pre-sanction output level of 4 million barrels a day, which is the level Iran said it plans to reach before even considering a cap on production.

 

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