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Saudi Arabia turns oil weapon on Iran: Kemp
April 18, 2016 / 5:35 PM / in 2 years

Saudi Arabia turns oil weapon on Iran: Kemp

LONDON (Reuters) - Saudi Arabia’s decision to scupper negotiations on a coordinated oil output freeze in Doha on Sunday seems to confirm a significant shift in the kingdom’s oil policy.

Saudi Arabia's Oil Minister Ali al-Naimi arrives to a meeting between OPEC and non-OPEC oil producers, in Doha, Qatar April 17, 2016. REUTERS/Ibraheem Al Omari

For decades, the kingdom has insisted it does not wield oil as a diplomatic weapon, but at the weekend it did just that as part of an intensifying conflict with Iran. (“Saudi-Iran tensions scupper deal to freeze oil output”, Reuters, April 17)

The kingdom’s position on Iranian oil production has steadily hardened over the course of the last year and at the weekend it reached its logical conclusion.

Saudi Arabia will not accept any constraints on its output, even freezing at record levels, unless Iran agrees to similar controls, which it has rejected until production has reached pre-sanctions levels.

By insisting on this hard-line position, Saudi Arabia ensured the talks would fail, and the kingdom seems comfortable with the outcome. Diplomatic strategy seems to have trumped oil market considerations.

Saudi Arabia would rather have a lower oil price and lower revenues for all producers, including itself, rather than reach a production agreement that would deliver increased income to its arch-rival across the Gulf.

GULF RIVALRY

Iran has reiterated for more than a year that it intends to increase production to pre-sanctions levels before it will consider any restraint to help stabilize prices, a position that most other oil producers have quietly accepted.

Boosting oil exports and revenues in exchange for controls on its nuclear activities was the centerpiece of the deal between Iran and the permanent members of the United Nations Security Council reached in July 2015.

Saudi Arabia has consistently opposed the nuclear deal fearing that it will strengthen Iran economically and allow it to increase funding for proxy conflicts in Lebanon, Syria, Iraq and Yemen.

Until recently, however, the kingdom’s oil policy appeared to be in the hands of technocrats in the petroleum ministry and Aramco, rather than be run as a branch of foreign policy.

Saudi officials privately cast doubt on whether Iran would be able to increase its exports as rapidly as it claimed once sanctions were lifted.

But the official line was that growing world oil demand would help the market accommodate extra Iranian crude without any need for output restraint by other producers.

ROAD TO A DEAL

By the end of 2015, it was clear the Saudi strategy of maintaining production and allowing low prices to drive high-cost producers out of business was working more slowly than originally expected.

Amid pressure from some of the weaker members of OPEC in Latin America and Africa, as well as Russia, the Saudis reluctantly and provisionally agreed to an output freeze in February 2016.

At Saudi insistence, the agreement between Saudi Arabia, Russia, Venezuela and Qatar, was conditional on adherence by other major oil producers.

So over the last two months, an intensive round of diplomacy assembled a large group of OPEC and non-OPEC producers representing 50 million barrels per day of production, more than half the world total.

Sixteen oil-producing nations sent representatives to the summit in Doha meant to conclude a deal on a production freeze.

Even if it had been successfully concluded, the draft agreement would have been weak. It would not have removed actual barrels from the market but it was meant to offer symbolic support to prices by encouraging hedge funds to focus on the gradual rebalancing of the underlying physical market.

HARDENING LINE

In the end, most major producers sent representatives to Doha with the exception of the United States and Canada (unable to coordinate production because of antitrust laws), China (a net importer), Iran and Brazil.

It seems unlikely most of the participants would have agreed to attend unless they believed there was a realistic prospect of reaching a deal, since a failed summit would be worse than none at all.

Pre-summit diplomatic contacts must have left most other countries with the impression Saudi Arabia was open to a deal that would necessarily exclude or make special provision for Iran.

In the run up to the summit, however, the Saudi position appears to have hardened. On the eve of the meeting, Saudi Arabia’s Deputy Crown Prince Mohammad Bin Salman warned the kingdom could increase its output immediately to 11.5 million barrels per day and 12.5 million within 6-9 months.

The prince said the kingdom would increase its capacity to 20 million barrels per day if it chose to invest and reiterated any production deal would be contingent on Iranian participation (“Saudi prince says he could add a million barrels immediately” Bloomberg, April 16).

The comments could be interpreted as negotiating rhetoric, nonetheless such a late intervention was ominous.

Saudi delegates arrived in Doha still apparently committed to reaching a deal but at the last minute insisted on substantial changes to the draft (“No agreement on oil freeze at Doha meeting”, Wall Street Journal, April 17).

“In the very early hours of Sunday morning, veteran Saudi oil minister Ali al-Naimi received a call from Riyadh, and then informed his delegates that they would need to scrap the draft agreement for a freeze that didn’t include Iran, according to a person familiar with events,” the Wall Street Journal reported.

The same story emerges from other sources. Russia’s energy minister blamed “some OPEC countries” for trying to change the terms of the agreement at the last minute “trying to get concessions from countries that are not here” (“Russia ‘disappointed’ by Qatar oil talks,” Russia Today, April 17).

OIL AND DIPLOMACY

Saudi Arabia has never been enthusiastic about coordinated production restraint, endorsing the principle while stating tough conditions that would make it all but impossible in practice.

The kingdom is likely to pay a diplomatic price for derailing the negotiations at such a late stage, embarrassing everyone else, but senior policymakers evidently decided no deal was better than even a weak one.

With so many other producing countries present at Doha and ready to agree to a production freeze, there was a deal on the table that met most of the conditions that the Saudis set months ago.

Saudi Arabia was not being asked to cut production, merely avoid it increasing for six months until a review in October, which would have been a fairly empty gesture.

The only condition not met was participation by Iran, a relatively marginal consideration from an oil market perspective, but critical from a diplomatic one.

Some analysts see a more straightforward motive for Saudi Arabia’s refusal to sign up: the kingdom is worried oil prices are rising too soon and too far, throwing a potential lifeline to U.S. shale drillers and other higher-cost producers.

Rising prices put at risk the market rebalancing Saudi Arabia and its allies have painfully pursued over the last 18 months (“Saudis won’t shed any tears over Doha”, Bloomberg, April 17).

The two explanations (diplomacy and market rebalancing) are not mutually exclusive. But it seems oil policy has to some extent become embroiled in the kingdom’s broader conflict with Iran.

“Saudi Arabia’s increasingly bitter dispute with Iran is now being played out in the oil market”, according to my colleague Andy Critchlow (“Proxy war”, Reuters, April 18).

The kingdom’s oil minister has been sidelined and that oil policy is now apparently being directed by the royal court and the deputy crown prince, where it is treated as an aspect of diplomacy.

Saudi Arabia has taken an increasingly assertive position on a range of foreign policy issues since the accession of the new king last year. Economic diplomacy is an increasingly important part of that effort.

Saudi Arabia has tried to restrict the resumption of Iran’s exports by warning tanker companies that they will be blacklisted if they carry Iranian oil (“Saudi Arabia acts to slow Iran’s oil exports”, Financial Times, April 4).

The decision to derail the Doha discussion is consistent with an emerging pattern of economic warfare being waged by Saudi Arabia.

Unlike other oil producers, which are seeking higher prices, Saudi Arabia appears willing to risk lower prices that will hurt its own economy in the belief they will hurt Iran more.

Editing by David Evans

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