OPEC: rapprochement between Riyadh and Tehran

OPEC: rapprochement between Riyadh and Tehran

Giuseppe Acconcia
Giuseppe Acconcia | Journalist focusing on the Middle East
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After 8 years of negotiations, for the first time Saudi Arabia and Iran have reached an agreement in Algiers on the cut in production. It is important to understand what effect this will have on oil prices and on Iran's aspirations

On September 28, for the first time after eight years of negotiations, a preliminary agreement was reached by OPEC to reduce production levels from 33.2 million barrels per month to 32.5 million barrels. A final agreement is expected to be formalized on November 30 during the meeting of the 14 OPEC member countries to be held in Vienna. It is still unclear as to what extent this cut in production levels – less than 1% of global production and coming after months of discussions between the major producing countries, especially Iran and Saudi Arabia, will have on oil prices. However, after a few days since the announcement of the agreement, crude oil prices have already started to rise again, exceeding $50 per barrel.
The Iranian authorities, despite the now well-established fall in prices, have attempted to delay a decision in that regard as much as possible. Tehran’s goal has so far been to return, as close as possible, to pre-international sanction levels (2003) before giving its consent to any decrease in production. In the coming months, technical meetings will continue between Saudi and Iranian delegates to set Tehran’s production ceiling. All this in a context in which both countries are engaged in regional conflicts by proxy in Yemen and Syria, while the United States are delaying the lifting of sanctions imposed on Iranian banks.

A ceiling on Iranian oil production

The #OPEC meeting in Vienna will ratify the first cut in global #oil #production levels

After months of negotiations, Tehran has declared itself in favor of the Algiers agreement. Iranian Oil Minister Bijan Zanganeh has confirmed that Iran cannot but favor a formal agreement on the freezing of oil production. According to some analysts, the Iranian authorities have given the green light to a first cut in production, as called for by the Saudis, only because this does not necessarily imply a reduction in Tehran’s production capacity. In other words, Iran could also pursue its goals to increase production in the domestic oil market since other countries, especially Nigeria and Venezuela, are seeing their production levels continuously decrease. The maximum ceiling that the country could hope for, according to local analysts, is 4.2 million barrels per day (approximately 13% of OPEC production): a very high level of production, considering the quality of Iranian oil sector technology that can still be improved and the only partial lifting of international sanctions against Tehran. For this reason, some analysts, quoted by the Financial Times, said they are skeptical of Iran’s ability to increase production in the short term even only up to 3.9 million barrels per day.
For its part, Saudi Arabia, on the eve of the meeting in Algiers, leaked its intention to focus on cuts in production while leaving the estimate of the current 3.6 million barrels per day of Iranian oil unchanged. Afterwards, there was talk of an increase to 3.7 million barrels per day for Tehran, considered by Riyadh to be the maximum level Iran could hope for on paper.

The final agreement is expected to be formalized on November 30, 2016 during the meeting of the 14 OPEC member countries to be held in Vienna

A new page for the Iranian economy

The decision comes in an encouraging context for the Iranian economy. According to the Iranian oil minister, the level of oil production planned for 2016 is 3.8 million barrels per day, therefore very close to the level preceding the sanctions, at 4.2 million barrels per day, when Iran was the second largest OPEC oil producer.
Moreover, numerous agreements in the sector have been signed in recent months. The latest concerns the company Setad, which signed $2.5 billion agreements for the development of oil wells in the Yaran oil field. For its part, the French automobile group PSA and Iranian company Saipa signed an agreement for the production, in a joint venture, of Citroen cars at the Kashan plant, with an investment amounting to €300 million. Finally, Iran will be the guest country at the Fiera di Roma from November 22 to 26, 2016. Italy, Germany and France were the first three European countries to thaw Iran’s billions of dollars frozen in local banks, vying for primacy in bilateral trade with Iran, after the lifting of the sanctions, established in January 2016, following the nuclear deal signed in Vienna in July 2015. The OPEC meeting in Vienna will ratify the first cut in global oil production levels. However, a reduction of 700,000 barrels per day might not have significant long-term effects on oil prices. On the other hand, an agreement providing for a ceiling on Tehran’s oil production as close as possible to 4 million barrels per day (pre-sanction production) would be favorable to the Iranian authorities during the technical meetings. All this in a context of economic recovery that favors foreign investments in Iran, despite the tensions over the management of the main regional crises with Saudi Arabia, the country that has most focused – in addition to limiting Iran’s aspirations following the end of the sanctions – on reducing OPEC oil production.

The decision comes in an encouraging context for the Iranian economy. The oil production level planned for 2016 is 3.8 million barrels per day