On Friday, after reading the latest shift in the ever-changing, always fluid OPEC narrative, according to which Saudi Arabia now demands Iranian oil production cuts contrary to the agreement reached at the end of September in Algiers, in which Iran was granted an exemption from the upcoming supply cut negotiation in Vienna on November 30, we were confused:
Wait so the Saudis demand Iran cuts production now after explicitly granting Iran an exemption in Algiers?— zerohedge (@zerohedge) November 25, 2016
This morning there is less confusion because according to Iran's semi-official Mehr news agency, the OPEC agreement is effectively dead with Iran's government mouthpiece reporting that "on the eve of OPEC Meeting, Saudi Arabia has officially declared a war on oil prices by releasing a tactical letter as well as applying pressure on certain OPEC members."
As the news report - which likely telegraphs the position of Iran's oil ministry - lays out, Iran is now once again lashing out at Saudi Arabia and raising a diplomatic scandal over the terms of the November 30 OPEC meeting just days in advance, in what will likely lead to a substantial renegotiation if not outright failure of the deal.
Here are the key excerpts from the report:
On the verge of the 171st Ordinary OPEC Meeting to convene on November 30 in Vienna of Austria and at a time when the world's major producers and exporters of crude oil are preparing to adopt one of the most historic decisions on freezing oil prices, Saudis seem to have reneged on earlier promises.
During the earlier informal meeting of OPEC ministers in Algeria in late September, members of the Organization of Petroleum Exporting Countries (OPEC) reached a consensus on putting a cap on production levels and the session urged participants to prepare for freezing or even reducing OPEC's aggregate oil output to 32.5 million barrels per day by holding expert meetings and forming a common working group.
Over the past few weeks, several meetings at expert level were held among member states in different parts of the world and even non-OPEC states like Russia, Kazakhstan, Azerbaijan and Oman voiced readiness to stabilize or decrease their production levels.
Nevertheless, Saudi Arabia has questioned all agreements and negotiations on freezing oil prices by publishing a political and planned letter ahead of the forthcoming OPEC meeting.
Accordingly Saudi Arabia, in an official letter to OPEC, has announced that it will not take part at the lower-tier talks on Nov. 28 in Vienna ahead of the OPEC ministerial meeting on Nov. 30 since "OPEC ministers first need to agree on cutting output and inform non-member countries about their agreement."
When news of this surprising announcement by Saudi Arabia hit on Friday, oil tumbled the most in weeks. However, if Iran is right, and if the Saudi move indicates that the preliminary Algiers framework is dead, then crude has a long way more to fall:
In time with the tactical retreat on Saudis from attending the joint meeting of OPEC and non-OPEC members on Monday, Russia has also announced that it will not participate in the session in order to make any comprehensive deal literally impossible.
Needless to say, Iran is not happy with what it sees as Saudi Arabia reneging on the terms of the origianl deal to "pressure" member states into once again accepting its demands, something that has been a key hurdle to any OPEC deal since November 2014: "apparently, under the pretext of lack of agreement among members, Saudi Arabia refuses to attend the Monday meeting, while in fact, Saudis, as OPEC's largest oil producers plan to apply pressure on certain countries in order to dictate their policies to the member states."
The Iranian complaint is simple: it believes it should be allowed to produce more:
In the past 12 years, Saudi Arabia and Iraq have enjoyed the lion's share in crude production among all OPEC members to the extent that both countries, Saudi Arabia in particular, have taken over shares of other states by exploiting turbulent conditions like Iran's oil sanctions, Libya's internal conflicts, technical issues in Venezuela's oil industry not to mention ongoing disputes in Nigeria.
According to secondary sources, Saudi Arabia's production share in OPEC has risen from 29.1% in 2004 to 31.5% in 2016 and the figure for Iraq increased from 6.5 to 13.2 per cent in the same period.
Moreover, share of the UAE rose from 7.7 to 8.8 and for Kuwait from 7.6 to 7.8 while the figure for Iran dropped from 13% in 2004 to 8.6% in the present year even though the country's production soared following implementation of the Joint Comprehensive Plan of Action (JCPOA).
Furthermore Iran's production concerns, explained previously, are legitimate: "The aggregate total of oil output in Saudi Arabia has reached 10.525 million barrels per day (bpd) indicating a rise of over one million bpd as compared with the year 2014. Iraq's crude oil production also rose from 3.11 million to over 4.776 million bpd in the same timespan. Iran's output level, however, stands at about 3.92 million bpd still lower than pre-sanction levels which were over four million bpd."
As a result, it all boils down to market share:
In other words, Saudi Arabia has, in one sense, seized shares of other OPEC manufacturers during the past decade and, once again though this time with a politically-motivated and non-economic plan, Saudi princes intend to wage a full-blown psychological war against Iran and a number of other OPEC members in order to prevent achieving a comprehensive agreement on reduction of oil output so that they could maintain the highest production capacity while ignoring interests of other members.
What happens next? According to Iran a full court press by Saudi media "friends" to scapegoat Iran as the offending party should the Vienna summit fail to reach a solution:
No doubt in the remaining hours before the OPEC meeting, Saudi Arabia will resort to some Western media to launch a new psychological war against Iran's oil industry in order to virtually direct attention of market activists from its own uncapped and high output levels to countries like Iran, Iraq and other OPEC countries.
In the meantime, it is worth recalling that due to the sharp decline in global oil prices from $100 per barrel to lower than $50, any decline in oil market will undoubtedly bring about the greatest loss to Saudis, with a production of over 10.6 million bpd, than it would do to Iran who produces less than four million bpd.
What makes matters worse for Saudi Arabia is that Iran is now confident it can pursue its oil strategy on its own, and does not need either OPEC or Saudi Arabia to further its interests:
Despite all measures taken by Saudis, Iran has reached a record high in oil sales by deploying 2.442 million barrels of oil per day to global markets, marking anunprecedented figure in the past two decades. Moreover, Iran has recently managed to find a place in emerging markets like Poland, Hungary as well as some states in the Eastern Bloc of Europe.
Also in Asia, Iran has taken over the place of Saudi Arabia turning into the largest supplier of crude oil to India and statistics reveal that in October, Iran shipped 789 thousand barrels of crude to the Asian state remaining ahead of Saudis who exported 697 thousand barrels in the same time preiod.
The question remains whether Saudi Arabia will manage to attain its political objectives in the oil market by waging a new oil war on the verge of the OPEC meeting in Austria in order to postpone the plan to freeze OPEC's oil output.
We will know the answer in three days.
Original report here