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.

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.

Copyright The Financial Times Limited 2013.