Saudi Opposition to Iran Fades on $100 Oil Goal
Saudi Arabia's biggest cut in oil output in three years is a sign OPEC's largest producer is finding common cause with its long-time rival Iran.
The kingdom reduced supply by 400,000 barrels a day, or about 4 percent, last month, Oil Minister Ali al-Naimi said Oct. 8, reversing increases that it started in April when declining Libyan exports sent North Sea Brent to a 2 1/2-year high. Crude prices have fallen 13 percent since then as the North African nation revived production and the International Energy Agency lowered its forecast for global demand.
Cutting output brings Saudi Arabia closer to Iran, which this year urged Arab members of the Organization of Petroleum Exporting Countries to restrict supplies. Tension between OPEC's two top producers escalated in March as Persian Gulf nations accused Iran's Shiite leaders of supporting unrest in Bahrain and other Sunni-led monarchies, a charge Iran denies. Relations soured further when Iran opposed a Saudi proposal at OPEC's conference in June to pump more oil.
“Despite their mutual antipathy, neither country wants prices to fall below $100,” Leo Drollas, the London-based chief economist at the Centre for Global Energy Studies, an oil consultant founded by former Saudi Oil Minister Zaki Yamani, said in an Oct. 25 interview. “Iran needs oil as high as it can get it, while the Saudis can live with $90. As oil falls, they become reluctant bedfellows.”
OPEC Basket
OPEC's oil basket, a weighted average of the group's main export grades, fell to $99.64 on Oct. 3, dropping below $100 a barrel for the first time since Feb. 18 and ending its longest run above that level. Brent, a benchmark for more than half the world's oil, slid 11 percent on the ICE Futures Europe exchange in September, the biggest monthly decline since May 2010.
Brent closed on Oct. 25 at $110.92 a barrel, 12 percent below this year's high of $126.65 reached on April 8. OPEC's basket was worth $109.11 on Oct. 24.
Saudi Arabia reduced supply to 9.4 million barrels a day in September, from 9.8 million in August, according to the Riyadh- based Joint Organization Data Initiative, or JODI, which compiles statistics supplied by governments. The kingdom hasn't lowered output so much in any month since December 2008, when OPEC sought to revive prices as the global financial crisis began driving the world into a recession.
The IEA cut its 2011 global oil-demand forecast for a third month on Oct. 12. The world will consume 89.2 million barrels a day this year, the Paris-based adviser to 28 governments said in a monthly report, compared with a July forecast of 89.5 million. It also lowered expectations for 2012 demand.
Murder Plot
Saudi Arabia, a mainly Sunni kingdom allied with the U.S., accounted for 28 percent of OPEC production last year, according to the producer group's own data. Iran, led by Shiite Muslim clerics and subject to U.S. sanctions because of its nuclear program, supplied 12 percent.
The U.S. said Oct. 11 Iran was behind a plot to murder Saudi Ambassador Adel al-Jubeir. Manssor Arbabsiar, an Iranian- American car salesman, pleaded not guilty in a Manhattan federal court on Oct. 24 to conspiring with a member of Iran's “Qods Force” to kill the diplomat. Saudi Foreign Minister Saud al- Faisal on Oct. 13 called it a “dastardly act,” vowing that his government would hold Iran “accountable for any action taken.” Iran has denied the accusation.
“The assassination plot was only announced this month, so we need to see the dynamic over the next few months,” said Olivier Jakob, managing director of Petromatrix GmbH, an oil- market research company in Zug, Switzerland. “If the Saudis want to push for more sanctions, they will need to show they are willing to replace any loss in production from Iran.”
Saudi Capacity
While Saudi Arabia has boosted output capacity to 12.5 million barrels a day, Iran's will decline by about 20 percent to 3 million barrels a day by 2020 as sanctions discourage foreign investment, according to the IEA.
The kingdom has increased supplies by 17 percent since the start of year as Libyan exports collapsed amid fighting to oust Muammar Qaddafi, JODI data show. Iran has kept output little changed in the past three months at about 3.6 million barrels.
OPEC failed to reach a consensus at its June meeting when six members including Iran opposed Saudi Arabia's push to pump more oil. It was “one of the worst meetings we've ever had,” al-Naimi, 76, said after the Vienna talks. The country went ahead with an increase regardless. OPEC meets next on Dec. 14.
Balancing Market
Saudi Arabia has stepped in before to balance the oil market as production from other OPEC nations floundered. The kingdom pumped a record 9.9 million barrels a day during the Iran-Iraq war from 1980 to 1988. It also increased supply in the first Gulf War and again in 2003 during the U.S.-led invasion of Iraq. Each time, the nation trimmed exports as prices fell.
Oil tumbled to $10 a barrel in the year that followed its decision in late 1997 to push through an OPEC increase, punishing Venezuela, Nigeria and other members that were flouting their official quotas.
Brent will average $107.28 a barrel this quarter, according to the median estimate of 34 analyst forecasts compiled by Bloomberg. Saudi Arabia wants to keep oil between $90 and $100, Barclays Plc and Deutsche Bank AG said on Oct. 17.
“There is no indication whatsoever that the Saudis are considering using their considerable spare oil production capacity to displace Iranian oil, or make it more difficult for Iran to sell its oil,” said Bhushan Bahree, senior director for global oil at IHS-Cambridge Energy Research Associates in Cambridge, Massachusetts. “Besides, if Iran finds itself pressed in the marketplace, it can turn to new customers, or generate buying interest for its oil by discounting it.”
Funding Spending
Middle East and Persian Gulf nations are looking to earnings from oil to fund social spending after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria, according to Bank of America Corp. OPEC's 12 members are forecast to earn an unprecedented $1 trillion in oil revenue this year, U.S. Energy Department said.
“The Saudis typically make decisions based on what's in their own best interest,” said Adam Sieminski, chief energy economist at Deutsche Bank in Washington. “Their second priority is to do what's best for global economic conditions. The Saudis probably like seeing the price of Brent between $90 and $100, more than at either $75 or $125.”
--With assistance from Mark Shenk in New York and Robert Tuttle in Doha. Editors: Raj Rajendran, Stephen Voss
To contact the reporter on this story: Ayesha Daya in Dubai at adaya1bloomberg.net
To contact the editor responsible for this story: Stephen Voss at sevbloomberg.net