Last updated: December 4, 2013 4:45 pm

Iran threatens to trigger oil price war

Tension between Iran and Saudi Arabia over Tehran’s plans to raise oil output spilled into the open on Wednesday as Opec rolled over its production target in the belief a wall of supply will fail to materialise next year.

The oil producers’ cartel controls around a third of the global oil market and, as the only source of spare capacity, exerts a big influence over prices.

But it faces a growing challenge to accommodate fast-rising US shale production, and balance the aspirations of Iran and Iraq, as both members threaten to increase output aggressively regardless of group targets.

Buoyed by an interim agreement on its nuclear programme 10 days ago, Tehran hopes to raise crude production quickly from levels of 2.7m barrels a day if it reaches a deal to roll back sanctions. Iraq has also said it plans to increase production by 1m b/d next year to 4m b/d.

Speaking in Farsi to Iranian journalists before ministers met in Vienna on Wednesday, Bijan Zangeneh, Iran’s oil minister, threatened to trigger a price war, warning Opec members that it would increase output even if crude prices tumbled. He said: “Under any circumstances we will reach 4m b/d even if the price of oil falls to $20 per barrel.”

“We will not give up our rights on this issue,” Mr Zangeneh said suggesting other Opec members would cut production to accommodate its return to the market, while keeping prices high.

Both Iran and Iraq face significant challenges in meeting their ambitious targets, however: Iran cannot export oil to the European Union or the US, while Iraq’s oil industry is hamstrung by infrastructure bottlenecks and growing security problems. Analysts said Iran’s aggressive language should be seen as an attempt to lay the ground for future discussions with Saudi Arabia, Opec’s de facto leader.

“You have to start with a tough negotiating position, even if you don’t mean it,” said Jamie Webster, head of market intelligence at PFC Energy.

In depth

Iran under Rouhani

'Iran after Rouhani' in depth

Iran’s President Hassan Rouhani is looking to pursue a foreign policy of moderation after tough financial sanctions have brought the Islamic Republic’s economy to a standstill

Saudi Arabia, the world’s largest oil exporter, would face most pressure to cut back production to accommodate Iran and Iraq, as the kingdom has been producing near record levels of more than 10mb/d, as production from other Opec members has faltered.

But Saudi officials have suggested Iranian and Iraqi production growth is unlikely to materialise quickly. Ahead of the meeting Ali al-Naimi, the Saudi oil minister, brushed off Iran’s aggressive stance on price.

“You are preoccupied by Iran and that is not a good preoccupation,” he said. “You know what is going to happen if the price goes to $20? You know how many countries would be out of producing, including shale oil, including Canadian sands oil, including subsalt oil. All of that will be gone.”

Brent has averaged close to $110 a barrel this year, easily above the group’s unofficial target, as production disruptions in Nigeria and Libya have offset rapidly growing US shale oil output. On Wednesday, Brent hit a two-month high of just over $113 per barrel. In the absence of an imminent supply glut, the cartel opted to continue targeting production of 30m barrels a day of crude oil.

Brent fell sharply on the decision to as little as $111.46 per barrel, but recovered to trade at $112.55.

In its official communiqué, Opec highlighted economic growth as the primary threat to high oil prices, rather than supply growth. “The biggest challenge facing . . . oil markets in 2014 is global economic uncertainty,” the group said.

But there were signs the cartel was considering how it might discipline production next year, should US production growth continue to eat into its share of the market, and Iran and Iraq deliver some growth.

Iraq is exempt from the group production targets, as it seeks to rebuild its industry. But several Gulf officials suggested it should be brought back into group target next year – an idea which Baghdad resists. Other Gulf delegates said the cartel should consider reintroducing quotas for individual countries, which have not been published since 2008.

“At some point next year we will need a more formal system of supply management,” said Bill Farren-Price, of Petroleum Policy Intelligence.

Related Topics

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

COMMENTS (12)
1 person listening
 
By submitting this comment I confirm that I have read and agreed to the FT Terms and Conditions. Please also see our commenting guidelines.

From the Archive

That's an interesting comment from Bill Farren-Price at the end. What should that formal system cover? Only OPEC (one-third of current oil production) or the whole market, including high-cost shale and North Sea supplies?

"“You have to start with a tough negotiating position, even if you don’t mean it,” said Jamie Webster, head of market intelligence at PFC Energy."

That sounds like a chapter from a book called "Faking It" chapter 3; Anti-Hypocrisy - Looking bad in order to be good. It is suggested that St. Thomas Aquinas wore very itchy hair wool shirts underneath his plush and soft outer garments - as a form of penance for being so outwardly extravagant - which reminds me of a lyric from a "Green Day" song "the more you suffer, the more it shows you really care". right, yeeaaaa.

It should be pretty obvious from this article who is most likely to be behind the recent bombings in Baghdad and Mosul.

"Means, motive, and opportunity"

https://en.wikipedia.org/wiki/Means,_motive,_and_opportunity

http://www.bbc.co.uk/news/world-middle-east-25095796

When Iran's minister said "even if the price of oil falls to $20 per barrel" he would not give up his country's "right to produce 4mn b/d under any circumstances", he was using the rhetorical device of hyperbole. It is rather sad that reporters see the quotations and take them at face value, concluding absurdly that a price war is breaking out in Opec. The references to a price war in the headline and in the paragraph quoting the minister are not backed up by anything else in the rest of the article. The first paragraph is also a bit odd, because - as the rest of the article makes clear - there is no tension over oil supply between the Saudis and Iranians. The article is a bit confused about Opec's production ceiling which, at 30 million barrels per day, does include Iraq. There is no exemption for Iraq in the collective production level, so the statement that "it should be brought back into group target next year" makes no sense at all.

Iran will only be returning to its old OPEC quota level of output prior to recent sanctions.

Iraq on the other hand is already above its old OPEC quota level of production and is planning to at least double this by 2020.

Rather that wondering how Saudi will accommodate Iran's return and conflating Islams schism with what is really about to happen in global oil markets we should all be thinking about what Iraq's future production will do to prices.

How can Saudi cut by the Iraqi increase when it already needs $100 bbls at current output rates to balance its budget?

Still, Iraq. We are all prisoners in the cage of drivel we have bought into about stealing or controlling or doing something to Iraq's oil when all that was done was allow Iraqis to vote their govt out with the result that all Iraqi governments have worked to maximise current oil production.

No wonder Saudi, OPEC's founder, is likely paying for the bombers who keep the lies going in Iraq. What is a greater threat to Saudi than OPEC loosing control of global oil prices and these prices then falling to the marginal cost of global production, probably nearer $30 than $50 with no OPEC quotas and production maximising licensing, exploration and production policies in producer states. How would Saudi pay for the welfare state that keeps their people happy?

The next few years may be very interesting times for OPEC. Or global oil demand may rocket and put the denouement off for a while longer, but only delay the inevitable as break even oil prices for OPEC states continue to inexorably rise.

Fascinating colour on why Saudi is so hostile to Iran coming back into the fold.

A drop in crude prices would be quite a tonic to still fragile Western economies. And She'll, BP and Total must be front runners amongst the majors looking to invest in Iran.

I'll believe it when I see it.

I am glad comrade obama let the Iran sanctions go by the wayside so that the iranians can drive the price of oil down.

Opec price war is good, right?

A wonderful Christmas present to the Great British public from Islam.

This puts the recent reconciliation with the uS and sch in a whole new different light. Saudis must be fuming...

It would be interesting to see how Iran (the member who established OPEC in the first place) would deal with the situation.

With Regards to Iran's Oil minister on "not giving up their rights". I think Iran has proved that they wont give up their rights when dealing with 5+1 and the sanctions.
Saudis are not so worried of having Iran back to the group but more worried about the growing power of Iran in the region. In any case, I dont think they will be able to stop Iran's influence on OPEC.

SHARE THIS QUOTE