Iran oil deal to fan OPEC discord as Saudis defend market share



RIYADH (Bloomberg) -- Saudi Arabia has impressed analysts and traders alike with its determination to keep oil flowing amid the selloff. Now the potential re-emergence of Iran as a global supplier, they say, will only deepen the country’s commitment to that tack.

Saudi Arabia, the world’s biggest oil exporter, wants to keep output up to pressure high-cost producers, such as U.S. shale drillers, and will grow more determined when faced by increased supply from political rival Iran, according to Citigroup Inc. and Societe Generale SA. Discord among OPEC members, at odds over the kingdom’s strategy, will flare again as Iranian output rebounds and may surface at the group’s next meeting in June, Commerzbank AG says.

“Iran coming back will reinforce Saudi Arabia’s policy,” said Miswin Mahesh, an analyst at Barclays Plc in London. “Saudi Arabia wouldn't want to yield market share to them at all, just because they’re so polarized.”

The revival of Iran, the most populous Shiite Muslim nation, may intensify its contest with Sunni-led Saudi Arabia for political influence in the Gulf. Fellow members of the Organization of Petroleum Exporting Countries, struggling with a 50% collapse in oil prices, may renew calls at OPEC’s June 5 meeting for Saudi Arabia to abandon its current policy and reduce output.

Nuclear Deal

Brent for May settlement lost 86 cents to $58.24/bbl on the London-based ICE Futures Europe exchange at 10:26 a.m. London time. West Texas Intermediate fell $1.31 to $52.67.

Iran reached a preliminary agreement with the U.S. and five other world powers on April 2, building toward a full accord by June 30 that would ease economic sanctions in return for curtailment of its nuclear program. The Persian Gulf state may be able to resume oil exports within months of a final accord, according to Commerzbank and UBS AG.

OPEC was split at its Nov. 27 meeting between a four-nation bloc of Gulf Arab states who pressed the need to maintain output in the face of rising U.S. shale supplies, and the eight other members, who unsuccessfully argued that production should be cut to defend prices. Iran criticized the policy in January, and said that fellow OPEC members should make way for its return. Saudi Oil Minister Ali Al-Naimi reiterated on March 4 that its current strategy will remain in place. He said Tuesday at a conference that the kingdom’s production will continue at about 10 MMbopd.

Increasing Exports

“I don’t see Saudi Arabia moving even a notch,” said Eugen Weinberg, head of commodities research at Commerzbank in Frankfurt. “Why should they? They would be giving up their market share to their arch rival. This situation will put OPEC on the brink again.”

Iran could increase oil exports by 300,000 bpd “soon after” sanctions are lifted by tapping supplies stockpiled on tankers, according to Vikas Dwivedi, an analyst in Houston at Macquarie Capital Inc. The country could increase production by 800,000 bopd to its full capacity of 3.6 million within three months, the Paris-based International Energy Agency said on Feb. 10.

Iran can achieve an additional 1 MMbopd within months, Oil Minister Bijan Namdar Zanganeh said on March 16. It wants to boost capacity to 4.8 MMbopd once sanctions are removed, Oil Ministry official Mohammad Sadegh Memarian said on Dec. 9. The nation was OPEC’s third-biggest member in March, sharing that position with Kuwait, according to data compiled by Bloomberg. It holds the world’s fourth-biggest crude reserves, data from BP Plc show.

Squeezing Producers

While Iran’s extra output won’t be welcomed by the Saudis, it will amplify their strategy of squeezing non-OPEC producers with lower prices, Societe Generale said.

“It’s kind of the current strategy, but on steroids, if Iran comes back,” said Mike Wittner, head of oil market research at Societe Generale in New York.

If the sanctions are lifted, the baseline forecast for world crude prices for next could be reduced by $5/bbl to $15/bbl from current projections, the U.S. Energy Information Administration said in a report on Tuesday.

Tensions escalated between the two countries last month as the Saudis directed airstrikes to buttress a Sunni-led government in Yemen against Shiite Houthi rebels whom the kingdom says are supported by Iran. They also are on opposite ends of the civil war in Syria, with Saudi Arabia backing Sunni rebels against President Bashar al-Assad, who has Iranian support.

“The real discussions within OPEC will be when Iran is fully back,” said Olivier Jakob, managing director of Zug, Switzerland-based consultancy Petromatrix GmbH. “Because then Iran will ask the other OPEC members to cut production in order to make some room for them. That’s when OPEC will need to make some decision on how it wants to function as an organization.”

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