Oil price falls as Saudi Arabia and Iran argue over output

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Rising tension has threatened to derail talks this month aimed at cutting oil production by Opec countries

Opec secretary general Mohammed Barkindo
Opec secretary general Mohammed Barkindo denied Saudi Arabia had made any threats. Photograph: Remo Casilli/Reuters

Squabbling between Saudi Arabia and Iran has sent the oil price down, as tension between the near neighbours threatened to derail talks aimed at cutting production by the Opec group of oil-producing countries.

Riyadh is reportedly threatening to turn the screw on Tehran before this month’s crunch Opec meeting by increasing its own output to push prices even lower.

Saudi Arabia produces up to 10.7m barrels per day (bpd), but Opec sources said it had threatened to open the taps much further.

“The Saudis have threatened to raise their production to 11m bpd and even 12m bpd, bringing oil prices down, and to withdraw from the meeting,” one Opec source told Reuters.

The cost of a barrel of Brent crude dropped to $45.02 before recovering to $45.42, down 2%, after Opec’s secretary general, Mohammed Barkindo, denied Saudi Arabia had made any threats.

Reports of a row come with Opec countries due to meet on 30 November to discuss curbing supply to boost prices, as they wrestle with a global oil glut.

They met at Opec’s Vienna headquarters last month to finalise the terms of an output cut from 34m bpd to as low as 32.5m bpd, but failed to agree quotas for each country.

“There’s a gang of four or five who don’t want any cuts at all, for all sorts of reasons. They [Saudi Arabia] are trying to whip the others into line and I think Iran will come into line,” said Malcolm Graham-Wood of advisory firm Hydrocarbon Capital.

“It’s a question of how they decide to word it so that everyone comes out looking politically sensible. There’s a lot of saving of face within Opec so that people don’t look stupid.”

Saudi Arabia, which has previously flooded the markets with cheap crude in a failed attempt to kill off the US shale gas boom, can afford to play chicken with Iran over prices. This is because Iran’s cost of production is higher, meaning it earns less per barrel, and it is still ramping up output after economic sanctions against it were lifted this year.

But Graham-Wood said Riyadh might simply be flexing its muscles as a negotiating tactic, pointing out that plans to list state oil company Saudi Aramco on the stock market next year mean it has more reason to protect oil prices.

“The last thing the Saudis want if they’re going to float Saudi Aramco is to have a bad oil market next year. So to save face, I think they won’t say publicly they’ll cut production but if they need the oil price up, they’ll agree with the Iranians that they both take some production off,” he said.

Al Stanton, oil analyst at RBC Capital Markets, said the uncertainty around Opec has left oil explorers and producers sitting on their hands. “The oil companies are likely to hold fire with their budgets until they’ve seen what happens,” he said.