Iran May Yet Save an OPEC Output Deal

Iran has offered OPEC something that could begin to ease the fraught atmosphere in Vienna. A potential compromise, though, would require the group to abandon individual output targets and see it cede market share to Saudi Arabia.

Iran’s oil minister, Bijan Zanganeh, told journalists that the group does not need to change its output deal, and insisted that he would veto any move to boost production. As I’ve argued, the Saudi shift away from the policy of cutting production left Friday’s meeting at risk of ending without an agreement, something that hasn’t happened since 2011. Zanganeh’s comments set it on that path.

But, he added that the group had already cut supply by much more than it had agreed, and in this point lies a way to resolve the tensions.

He’s right — OPEC and friends have been exceeding their agreed output cuts by the widest margin since the deal came into effect in January 2017, with compliance reaching 162 percent in May, according to analysis by Bloomberg. Having agreed to reduce their collective production by 1.176 million barrels a day from the October 2016 level, output in May was actually down by 1.9 million.

That over-compliance will increase once U.S. sanctions on Iran snap back into effect. Those restrictions may already be having an impact on the country’s oil exports, according to Bloomberg tanker tracking, which shows observed exports of crude and condensate falling to their lowest level in a year.

So far, Zanganeh is only proposing that individual countries return to their own pledged output levels. Most of those who have cut more than they promised can’t do that. Their over-compliance is not voluntary. As it stands, this is not enough to make a difference, or to offer a realistic change of saving OPEC’s Friday meeting. He needs to go further, accepting that OPEC’s overall production level matters more than individual national targets.

Fixing OPEC’s aggregate over compliance would add 724,000 barrels a day of OPEC supply to the market. Offsetting the expected future decline in output from Venezuela and Iran would require an even bigger increase from those countries with spare capacity.

Bringing the group’s output into line with its overall target would require an effective redistribution of market shares among members. While Saudi Arabia has voluntarily cut its output by more than it pledged, most of the over compliance to date has come about through the collapse in Venezuelan production and the decline in output from Angola.


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