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Iran claims freezing output would be ‘illogical’

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Hydrocarbon Engineering,

Recent discussions regarding cuts in oil production briefly lifted the price of oil on Friday (12 February 2016), only for the reality of opposing countries intentions to bring them crashing back down.

While Saudi Arabia, Iraq and Russia have all publically agreed to cut production in order to restore a balance to the global oil market, Iran feels that to impose new restrictions on its newly sanction-lifted output would be ‘illogical’ and unfair.

Mehdi Asali, as quoted in the Iranian newspaper, Shargh, said Iran would continue to increase it’s oil production until it reaches pre-sanction levels claiming, "Asking Iran to freeze its oil production level is illogical... when Iran was under sanctions, some countries raised their output and they caused the drop in oil prices. How can they expect Iran to co-operate now and pay the price?"

As reported by Reuters, top producers and exporters, OPEC power Saudi Arabia and non-OPEC Russia, agreed on Tuesday (16 February 2016) that they were willing to freeze production levels but said the deal was reliant on others joining in. OPEC members Qatar, Venezuela and Kuwait also said they were willing to commit to an output freeze, as well as Iraq, one the world's fastest growing oil producers in the last year, have said Baghdad would abide by a global deal that would aid in the recovery of oil prices. This kind of international agreement would be the first of it’s kind for 15 years, and would be a welcome course of action to help lift oil prices from the 70% slump its endured since the peak of US$116/bbl in June 2014.

Saudi Arabia’s Ali al-Naimi saod, "This is the beginning of a process which we will assess in the next few months and decide whether we need other steps to stabilise and approve the market", said Mr al-Naimi. "We don't want significant gyrations in prices, we don't want reduction in supply, we want to meet demand, we want a stable oil price. We have to take a step at a time," he said.

However, Iran would only consider introducing a freeze once production levels had hit pre-sanction levels, of more than 500 000 bpd. As exclusively reported by Reuters, two non-Iranian sources close to the Opec discussions said that Iran could be offered special terms as part of the output freeze deal. The specific terms were not elaborated on, which means they could technically be anything from setting limited production increase levels for Iran to linking future output rises to a recovery in oil prices.

The fact that Saudi Arabia and Russia’s output is near record highs, further complicates any international agreement since Iran is only producing 1 million bpd below its capacity and pre-sanctions levels, while the last time Russia made a deal with OPEC in 2001, they went back on what was agreed and increased their exports.

As reported by the BBC, Paul Stevens from the Royal Institute of International Affairs at Chatham House and an oil market expert said, "Before sanctions in 2012 Iran was producing around 4.4 million bpd. Just before sanctions were lifted in mid-January 2016 it was producing 2.8 million bpd. Officials have previously said they wish to increase it to 4 million bpd within the next three months. I think that is a wildly optimistic figure, but any increase still presents problems in terms of oversupply." Mr Stevens agreed an exception might be made for Iran, but he believed Monday's agreement had “no credibility whatsoever" and was a strategic move by Saudi Arabia.

Sebastien Marlier, a Commodities Analyst at the Economist Intelligence Unit said the current talks signified the start of a "fraught, protracted negotiation process within Opec. Yet joint output cuts by both Opec members and Russia remain a distant prospect". Marlier similarly found weight to the argument that Saudi Arabia was being tactical, "It shows that they are willing to collaborate and are not stubbornly sticking to their painful strategy of flooding the market to evict higher cost producers. It shifts the burden of responsibility for refusing to cut production to arch-rival Iran. Finally, it maintains the status quo while talks are ongoing, thereby continuing to press US shale and other struggling oil producers outside of OPEC.”

The geo-political stage remains tense as Saudi Arabia and Russia remain on opposing sides regarding the current war in Syria. Russia supports President Assad’s regime, alongside Iran, while Saudi supports the rebel forces.

Edited from various sources and written by Francesca Brindle

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