Saudi-Iran split dashes chance of OPEC deal to curb oil glut

LONDON — The collapse in relations between Saudi Arabia and Iran after the Saudi execution of a Shiite cleric puts an end to  speculation that the Organisation of Petroleum Exporting Countries (OPEC) could somehow agree production curbs to lift the price of oil anytime soon.

A Reuters survey of OPEC production showed on Tuesday that Saudi Arabia ended 2015 with its output at full tilt, with no sign of cutting supply to make room for Iran, which plans to ramp up its own output when international financial sanctions are lifted this year.

According to the survey, compiled from shipping data, oil company figures and industry experts, Saudi production for December averaged 10.15 million barrels per day (bpd).

That means it was above 10 million bpd for nine straight months, the longest period of sustained production above that threshold for decades.

The determination by the world's biggest exporter Saudi Arabia to defend its market share despite a global glut has helped drive oil prices to their lowest in 11 years.

Meanwhile, the lifting of sanctions on Iran in line with a nuclear agreement is expected to provide the biggest increase in supply of 2016. The world is now producing 1.5 million barrels a day more than it is consuming, and Iran is promising to add another million bpd to supply over the next 12 months.

OPEC failed to agree any caps on production at its annual meeting in Vienna last month, amid acrimony between Saudi Arabia and Iran, the Gulf region's main Sunni and Shiite powers.

If there was still any suggestion that the two rivals might somehow overcome their animosity to agree to manage supply this year, it was buried on Monday when Riyadh called off diplomatic ties with Tehran over Iran's response to the execution of Saudi Shiite cleric Nimr Al Nimr.

Several OPEC delegates told Reuters they now saw no chance of any improvement in relations between OPEC members, which have been already very low over the past months.

"This new situation will just make it worse and I see no agreement to be reached within OPEC," one representative to OPEC from a member country outside the Gulf region said, on condition of anonymity.

Fellow Gulf OPEC members the United Arab Emirates and Kuwait have backed Saudi Arabia in the diplomatic crisis that could deepen sectarian tension in the Arab world. Iraq, OPEC's second-biggest producer, has joined Iran in criticising Riyadh.

"The renewed surge in Saudi-Iran tensions could further exacerbate the ongoing fight for market share and create additional downside risks to commodity prices," Bank of America Merrill Lynch analysts, led Francisco Blanch, said in a note on Tuesday.

Longest sustained high production in decades

Oil prices have lost two-thirds of their value in the past 18 months and hit an 11-year low last month.

Oil prices initially rose after the cleric's assassination, the usual response to events heralding turmoil in the Gulf, but quickly settled back.

"There is certainly no chance of Saudi Arabia scaling back its oil supply to make space for Iranian oil," said Carsten Fritsch, analyst at Commerzbank. "The existing oversupply may actually grow further in the short term."

Iran has called on OPEC producers, especially both Saudi Arabia and Iraq, to curb supply to accommodate its new volumes, arguing that its production was artificially curtailed by years of sanctions over its controversial atomic programme.

Both Saudi Arabia and Iran, like other OPEC members, need higher oil prices to salvage their state budgets. The export group has acted jointly in the past to curb supply even when its members were at war, notably when Iran and Iraq fought in the 1980s. But this time around, there is no sign of a deal.

Saudi Arabia has been increasingly willing to confront Iran and its allies militarily since King Salman took power a year ago.

Last year, Riyadh began a war in Yemen to stop an Iran-allied militia seizing power there and boosted support to Syrian rebels against Tehran's ally President Bashar Assad.

While the tension between Saudi Arabia and Iran may make it harder to agree measures to restrict oil supply, Bjarne Schieldrop at SEB Markets said the uncertainty it created could still lead to prices going up.

More sectarian conflict in the Middle East could herald supply disruptions, and possibly even interfere with the lifting of sanctions on Iran.

"The Sunni-Shiite divide has now become much deeper with possibly more intense proxy wars in Yemen and Syria. The risk picture in the Middle East has clearly inched higher," he added.

"While we still expect the sanctions to be lifted, the latest events have definitely created some last-minute risk that things may not move in the direction widely expected. If the sanctions are not lifted as planned it would clearly reduce the projected crude oil surplus for 2016," he elaborated.