Iran now controls the future of the oil market. Earlier today, Reuters reported that Saudi Arabia has offered to cut production if Iran caps its own output this year, citing three sources familiar with the discussions.
Although details were sparse regarding what levels the Saudi’s would be willing to cut to, this is a large power shift within the negotiations. Riyadh has maintained their current policy of not cutting production since 2014. Does this signal their strategy to force smaller producers in an attempt to gain market share has failed? Not quite.
The market impact of their current policy has certainly left a lot to be desired. Prices have consistently remained below $50/bbl since July, 2015 and competition is still stiff. However, this may be a larger move to attempt to bring Iran closer to OPEC. Since sanctions have been lifted on the country, they have publicly stated they want oil production to return to pre-sanction levels - 4 million barrels per day.
As Iranian oil heads towards fully coming back on the market, they have been the ones increasing market share. Not the Saudi’s or Russia. The Director of International Affairs at The National Iranian Oil Company stated as recently as September 7th that “...as soon as we can come back to the previous production before sanctions, we can think about (freezing) and discuss.”
Going long or short crude into next week’s meeting now really comes down to one question: Will Iran freeze production?
That being said, as we’re writing this, news has come across the wire that a Saudi delegate has stated they are not likely to make a decision on production levels at next week’s meeting. So maybe the better question is, which Saudi source do you believe?
Stay tuned.
