OPEC rift is prelude to Iran market return
December 3, 2015, 3:44 pm

OPEC`s meeting this week is looking to be a showdown between Saudi Arabia and Iran, but analysts expect Saudi Arabia to prevail and OPEC will not cut production.

As a result, oil prices could continue to head lower after the meeting winds down in Vienna Friday. Oil plunged nearly 5 percent Wednesday, with West Texas Intermediate futures settling at s six-year low of $39.94 per barrel, on growing U.S. supply and a variety of competing comments from OPEC members, both for and against production cuts.

"Iran has made it very clear they feel perfectly entitled to come back to market with as much oil as they can," said Chris Weafer, senior analyst and founding partner at Macro-Adviory. "They believe they`re owed by OPEC because they were forced to take a million barrels out. They now want to bring as much of that back as they can. That`s what I believe we`re going to see very clear at OPEC."

But Saudi Arabian officials have said they would listen to members` concerns at the meeting but they also said they will not cut production unless other producers also cut back. So, the prospect of no cuts and even more oil from Iran coming to the market has made the prospect of a growing glut even worse.

"The others aren`t going to make any concessions to allow that," said Weafer of Iranian oil`s return. "You have an even more tense relationship between Saudi and Iran because of what`s happening in Syria. So, there`s even less political will to do a deal. They`re determined to protect their market share, and they`re not going to cut for anybody. And above all, they`re in no mood to do a deal for Iran…This is a war over market share and they`re not going to blink first."

The Organization of Petroleum Exporting Countries a year ago refused to cut production in the face of falling oil prices, and instead let the market determine price. As a result the world has become even more flooded with oil, and West Texas Intermediate crude has dropped by more than 40 percent.

OPEC members are feeling the pinch, and some like Iran and Venezuela, want Saudi Arabia to cut back its production, currently over 10 million barrels per day. But Saudi Arabia, the biggest oil exporter, is intent on keeping production high until higher cost producers cut back, with U.S. shale producers chief among them.

To make room for the return of Indonesia, OPEC could actually raise its 30 million barrel per day quota, which it has been surpassing.

"They have their foot on the throat of U.S. shale producers. So far, the Russians haven`t responded. The Russian oil minister says they`re still pumping at a post-Soviet era high of 10.87 million barrels. It`s incredible. It`s a market share battle for the ages," said John Kilduff of Again Capital. Non-OPEC Russia is the world`s largest oil producer currently, and the U.S. is third behind Saudi Arabia.

While U.S. shale producers are beginning to cut back, production is still high, and stockpiles continue to build. U.S. stockpiles grew for a 10th week, and U.S. production grew slightly to 9.2 million barrels a day, according to government data reported Wednesday. But Saudi Arabia is also feeling the pain of lower prices, and it has issued debt to make up for the revenue shortfall.

"It`s a game-changer. They always have yielded under pressure and played the swing producer, but no more," said Fadel Gheit, energy analyst at Oppenheimer.

"In my view, they are basically trying to get everybody in line. Everybody will get their marching orders from the Saudis. Anything less than that, then their objective will not have been met and they would have squandered hundreds of millions of dollars over the last year," said Gheit."It`s the lesser of two evils. Otherwise, they are going to be run by influences from outside…I believe they are waiting to see if Iran is really going to have an impact on the market."

Gheit said a reinvigorated Iranian oil industry could be powerful, and new investments in technology could make it a much stronger producer.

"Iraq is not Iran. Iran is different. It has plenty of brain power and infrastructure. It is not fighting a civil war. They will be able to speed up their recovery pretty quickly. They`ve been in the penalty box for 35 years. Thirty-five years is a long time to catch up on technology," he said.

Iran is expected to return to the market once it gets clearance from the International Atomic Energy Agency, which holds a board meeting in mid-December. The United Nations agency said Wednesday that Iran had a coordinated nuclear weapons program until 2003 and some activities continued as late as 2009. But it said there were no credible indications of nuclear weapons activity after 2009.

"All the preliminary findings have put Iran on the path to eventually getting the sanctions lifted," said John Kilduff of Again Capital.

Iran has been beating the drum for new investment in its energy fields. Last week, Iranian oil minister Bijan Zanganeh offered a new model for oil contracts for foreign firms, offering opportunities for $30 billion in investment in 52 fields.

"They (Saudi Arabia) are fearful of what Iran is offering to foreign companies. They want $30 billion investment to double their oil production to 5.7 million barrels. That would keep the oil price well below $50 for another 10 years. Saudi Arabia doesn`t want to take any chances. They are saying we will hold the fort until we see a clear sign of where this is going," said Gheit.

Weafer said it`s not the price of oil that will determine the deals in Iran, it`s the terms Iran ends up giving oil companies, who can take their time because of the low prices. Oil analysts expect Iran to slash prices to regain its market share in Europe.

"They have been offering cheap oil since the sanctions escalated anyway. They`re kind of into that mindset," he said. "There are reports Saudis have been undercutting Russia in the European markets and the Iranians will need to shift their oil...You`re now seeing a slight divergence between the official stated price of oil on the market and what you`re actually able to buy it for if you`re a big buyer, because the trend is down."

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