Saudi-Russian axis rules oil market

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June 28 (Reuters) – Iran may be Russia’s ally in the Syrian conflict but when it comes to oil, Tehran’s arch-enemy Saudi Arabia takes precedence.

Iran had been pushing hard for oil producers to hold output steady as U.S. sanctions are expected to hit its exports.

But Saudi Arabia and Russia had other ideas. According to three sources close to OPEC and Russia, the world’s two biggest oil exporters agreed in May to work hand in glove to engineer a sizeable increase in oil output – albeit for different reasons.

Russia and Saudi Arabia have effectively sidelined OPEC, driving policy for their own geopolitical ends.

With their end game in mind, Russia first proposed that the combined output of OPEC countries and non-OPEC allies, such as itself, should jump 1.5 million barrels a day (bpd) from July. Their tactic was for Saudi Arabia to then suggest a more modest rise of less than 1 million barrels in the hope it would be acceptable to Iran, the three sources told Reuters.

Saudi Arabia was keen to raise output to meet calls from U.S President Donald Trump and major consumers such as India and China to help cool oil prices and avoid shortages, according to Saudi officials including Energy Minister Khalid al-Falih.

Russia, meanwhile, was under pressure from its own energy companies to lift caps on output and fight a steep rise in domestic fuel prices that was hurting President Vladimir Putin’s popularity, according to two Russian oil industry sources.

In the end, Saudi Arabia pushed through a rise of 1 million bpd at the Vienna meeting, in line with the plan it had agreed with Moscow more than a month earlier.

Saudi Arabia insisted as recently as April it was too soon to open the taps but Riyadh made a U-turn after its ally the United States called on OPEC to boost supplies.

With Russia on the same wavelength for its own reasons, Iran had to be persuaded. But it was not without a fight, and some arm-twisting from Riyadh and Moscow, OPEC sources said.

A day before the official OPEC meeting on Friday, Iranian Oil Minister Bijan Zanganeh stormed out of a gathering of OPEC and non-OPEC allies saying there would be no agreement.

But a last minute conversation on Friday morning with Falih and Saudi minister of state for energy affairs Prince Abdulaziz helped convince Zanganeh, according to three OPEC sources.

If Zanganeh refused to sign up, Iran risked being isolated by other producers who would increase production anyway, sources said.

Zanganeh was also told if the deal was blocked by Iran, it may lead to the withdrawal of Russia from the agreement, the sources said. One of Tehran’s closest allies, Moscow is helping Iran fight to keep Syrian President Bashar al-Assad in power.

“We have 24 countries in the agreement, they can always be 23,” one of the OPEC sources said.

Kuwait, Oman and the United Arab Emirates also participated in efforts to convince Iran, according to OPEC sources.

 

The Saudi announcement took most OPEC members – and especially Iran – by surprise.

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