29 Mar 2024
Wednesday 4 December 2013 - 14:05
Story Code : 69109

Saudi Arabia responds to Iran's plans to boost oil output

Iran's plans to increase its oil output as it rejoins the global economy were the focus for discussions as oil ministers from the Organization of the Petroleum Exporting Countries (OPEC) met in Vienna Wednesday.
Ministers are widely expected to roll forward until June an agreement to hold their output near 30 million barrels daily for the 12 member countries, but analysts are focused on any reaction from other nations after Iran said it expects its output to be increased to 4 million barrels per day (bpd) by the end of 2014.

In response, Ali al-Naimi, Saudi Arabia's highly influential oil minister said he was not worried about Iranian oil oversupplying the market, according to the Dow Jones news agency, but stressed that if prices decreased it would not only be OPEC that would be affected.

"The market will accommodate it," he told CNBC at the meeting. He also rejected suggestions that Iraq had used Iranian sanctions to increase its own production, saying media outlets had made "assumptions".

Iran - the world's fourth biggest oil-producer according to the International Energy Agency (IEA) - and six world powers reached a breakthrough agreement in November to moderate Tehran's nuclear program in exchange for limited sanctions relief.

These sanctions by the U.S. and European Union on Iran's energy sector have prevented western energy companies from dealing with Tehran, slashing exports from 2.5 million bpd to around 1 million bpd.



Sanctions will remain in place and Iran hasn't permission yet to increase exports, but it does freeze U.S. plans for deeper cuts to Iranian crude exports. Iranian output stood at 2.65 million bpd in November, according to a Reuters survey.

Johannes Benigni, managing director of JBC Energy, told CNBC that Iran might be looking to increase production but the agreement with the U.S. and the EU hasn't yet been completed and any predictions might be premature.

"They might not cut a deal," he said. "If there is no deal there are troubles." Benigni added India would be one country willing to accept Iranian imports if sanctions were fully lifted due to the proximity and the price. "Indians like Iranian oil. To some extent they are all excited," he said.

Meanwhile, Iraq has said it is also targeting 4 million bpd as it recovers from years of war and sanctions. The country has already boosted production to nearly 3 million bpd this year. The country's oil minister stated at the OPEC meeting that it won't be cutting its production next year and it currently exports 2.4 million to 2.5 million bpd.

Libya has seen a cut in production due to ongoing tensions in the country after its civil war, but the country is also looking to return to full production soon. Its oil minister stated Wednesday that it hopes to return to full production of 1.5 million bpd one week after ports reopen in the country.

More oil flooding the market should send the price lower and it's down to OPEC to negotiate optimum capacity to keep the price at an ideal level - usually around $110. Saudi Arabia, OPEC's most influential producer with one-third share of group output, is traditionally the most flexible with its production. The country - which has strong ties to the U.S. - is the only producer globally that keeps any significant spare capacity.






Brent crude for January delivery was at $112.32 a barrel on Wednesday morning, ticking slightly lower since the start of the session. The benchmark - which is used to price two-thirds of the world's internationally traded crude oil dropped $2 after the Iran deal but quickly regained ground and is trading at the same price as it did at the start of the year.



 

Shale revolution

A higher price helps major Gulf producers ensure sufficient domestic budgets to cover key expenditure on social welfare. At the same time, prices have not risen to the elevated levels that may hurt demand from key consumers.

Future prices for Brent show markets are expecting a price fall in 2014, which Daniel Lacalle, senior portfolio manager at Ecofin, agrees with. He told CNBC that the "Middle East premium" is going to gradually recede and prices will fall.

"Falling energy prices are always very good for the economy....the biggest stimulus in the U.S. has not beenQE (quantitative easing), it's been the falling energy prices," he told CNBC Wednesday.

OPEC's negotiations come at a time when the U.S. is undergoing a revolution in shale gas and oil. The IEA has predicted that the U.S. will surpass Russia and Saudi Arabia as the world's top oil producer by 2015, and be close to energy self-sufficiency in the next two decades. OPEC, therefore, are expected to be ready to cut the production of oil at some point in the next few years as the U.S. ramps up its efforts.

By CNBC

 

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