Oil: Iran Digs in – A Delay, not Derailment

Published on March 10, 2016

The news ripped across the wires earlier this morning that the prospects for the planned oil producer meeting in Moscow on the oil output freeze were rapidly diminishing.

*** It is our sense this is still more eleventh hour negotiations, in this case, by Iran to carve out a higher OPEC quota level for down the road, than it is an outright rejection of the freeze or a derailment of the meeting. We still strongly believe the meeting will take place, once the Russians take the lead in making some concessions to Tehran, though the timing, even the location for the freeze meeting may be modestly delayed or moved. ***

*** It is important to note the Iranian demands are not about the freeze per se — as we have been reporting, both Russia and Saudi Arabia have already essentially agreed to an Iran exemption on the terms of the immediate freeze (SGH 2/16/16, “Oil: Another Step Towards Output Deal”); instead Tehran is making a preemptive move to carve out a higher quota for when OPEC comes to set the levels from which an eventual collective output cut may come later this year. ***

We might add that with negotiations still ongoing, the advent of the Persian New Year “Nowruz,” a major national holiday in Iran, on March 21 could present some further logistical challenges now on timing of the “freeze” meeting.

Iranians Seeking High OPEC Quota

To enhance their leverage for those negotiations, Tehran wants the “freeze” to apply to an output of 4 million bpd, a full one million plus bpd or more over their current output. The Saudis and the other OPEC members, while willing to exempt Iran from the immediate freeze, are unwilling to put a figure, especially such a high one, on what would in effect become the Iranian quota later this year. We doubt the Iranians will win quite such a concession.

Russian oil officials are very likely to press their Iranian counterparts to find a suitable compromise within the next week. We suspect that could entail an Iranian “freeze” on oil output somewhere closer to 3.5 to 3.6 million bpd at best. In theory, the Russians may also agree to move the location of the meeting closer to home for the Saudis, perhaps in the Gulf. That too, however, seems unlikely considering how much preparatory work the Russians have already done in anticipation of a meeting in Moscow.

There is always the chance the Iranians could hold out for more, and take such a hardline stance that it derails the broader oil freeze agreement altogether. But we rather doubt it, as do both the Russians and Saudis.

For one, the participation of the Kingdom is still the linchpin to the oil freeze and the recent uptick in oil prices. If the Saudi leadership concludes Iran is not going to compromise on their demands, they will feel free to re-open the taps and aggressively compete for market share where the Iranians are trying to rebuild market share. And that would be at the far lower prices that no one, including the Iranians, want.

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