By Ian Black and Terry Macalister
The Iranian endorsement of a plan by its arch regional rival, Saudi Arabia, to stabilize global oil prices could be seen as a diplomatic coup for Riyadh.
However, Tehran’s support for a production freeze has not been driven by a new desire for political rapprochement as much as acceptance of a greater enemy: collapsed commodity prices. The markets are flooded in crude at a time when demand is faltering due to the slowdown in expected growth from key importers such as China. Desperate times require desperate measures.
Iran and Saudi Arabia are rival oil producers but also bitter adversaries in regional politics. Short of a shooting war, tensions could hardly get any worse at this particular moment.
The Saudis severed diplomatic relations with Iran in January following a mob attack on their embassy in Tehran – a protest at the execution of a leading Shia cleric, Nimr al-Nimr, in Saudi Arabia’s eastern province.
The two countries stand on opposite sides in the wars in Syria and Yemen – their strategic competition is interlaced with vicious sectarian hostility – adding a proxy element to an already toxic mix.
Despite this unpromising geopolitical backdrop, last week there were positive moves towards an oil production deal. The price of Brent blend crude soared 7.5% on Wednesday after Bijan Zanganeh, Iran’s oil minister, came out of a two-hour meeting with some of his OPEC counterparts to approve a deal hatched by Saudi with non-OPEC member Russia the day before.
“Iran backs any measures which help stabilize the market and improve the price of crude oil,” said Zanganeh, although, crucially, he gave no indication as to whether Iran would curtail its own production.
Iran, which has the fourth-biggest oil reserves in the world, had previously trumpeted its desire to vastly expand its output following the lifting in January of western sanctions imposed over its nuclear program.
It still remains unclear exactly what will happen now: the Saudis and Russians said they would hold their output at January levels, but only if other key players – including Iran – joined in.
Deals of this kind were brokered by Saudi Arabia in the 1980’s only to see Russia and others renege on their commitments, forcing Riyadh to cut its output from 10 million barrels per day (bpd) to 2.5 million with little impact on prices.
Last week the price of Brent blend continued to rise towards $36 per barrel following Iran’s statement, although it fell back on Friday in the face of new US data showing stockpiles of oil were bigger than ever. This is still well ahead of the sub-$28 price seen last month but a long way off the $115 highs back in June 2014.
Oil traders and investors see last week’s developments as an increasingly hopeful sign that producers have reached their pain threshold and will do what it takes to try to force prices upwards again.
However, the wider political and religious rivalry between Saudi Arabia and Iran is unlikely to go away any time soon.