June 16, 2012

Iran and Iraq are forming a strengthening alliance inside Opec, raising concerns among moderate Arab Gulf producers like Saudi Arabia and increasing the potential for discord in the oil producers’ group.

With the EU sovereign debt crisis worsening and growing fears for the global economy, the deep divisions within Opec risk undermining the organisation’s ability to do its job of effectively managing oil supply and preventing violent price swings.

A person familiar with the matter said Opec’s meeting in Vienna on Thursday was overshadowed by "strong disagreements" over issues ranging from the acceptable price of oil, to the global supply-demand balance, to who should replace the current secretary general of the organisation.

A particular bone of contention was a proposal by Venezuela – backed by other Opec hardliners like Iran, Iraq and Algeria – that the group should protest against the EU sanctions against Tehran over its nuclear programme. The move was rebuffed by Saudi Arabia and other moderates including Nigeria, Libya and Kuwait, who argued that such protests were the preserve of foreign ministers, not oil ministers.

Riyadh is determined to prevent the group being dragged into Iran’s nuclear standoff with the west, and until Thursday, member states had done a good job of papering over their differences on the issue.

"We have to make sure that Opec remains non-political," said a Saudi official. "It is a business organisation and politics should be avoided."

But the latest bust-up shows it could prove increasingly difficult to maintain that neutrality, with the issue of sanctions reinforcing already deep divisions between hardliners Iran, Venezuela and Algeria and moderates like Saudi Arabia and its Gulf allies Kuwait and the UAE.

The politicisation of Opec bodes ill for the future. "Oil and politics make a really toxic mix, as we saw with Opec in the 1970s," said one analyst. He said the rift meant it would be harder for Opec to take "concerted action in the event of a major bout of price weakness".

The meeting also showed that Iraq has now joined the hardline camp, whose members are clearly co-ordinating their positions on key aspects of Opec policy, the person said. Earlier this month, Rostam Qasemi, Iran’s oil minister, visited Baghdad for talks with Nouri al Maliki, Iraq’s prime minister, and during the visit it was announced that the two had agreed to adopt a unified position on Opec production.

That raised the spectre of an oil alliance between Iran and Iraq, which could challenge Saudi Arabia’s traditional dominance of Opec.

At Thursday’s meeting, Opec ministers agreed to leave their current production ceiling unchanged at 30 million barrels a day. The group’s secretary-general Abdalla El-Badri said members were asked to adhere more strictly to the target, which they now exceed by 1.6 mb/d according to Opec’s own figures.

The meeting took place against the backdrop of a sharp drop in oil prices, from a peak of $128 a barrel in March to below $100 now. Some countries, principally Iran, have said the market is over-supplied and have called on Saudi Arabia to cut production.

But so far the kingdom, worried about the potential effect of high oil prices on an already weakening global economy, shows no inclination to comply. It has been pumping crude at 30-year highs this year in an attempt to bring prices down to $100.

"Saudi Arabia will continue to meet its customers’ needs within the context of a stable and balanced oil market," the Saudi official said.

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