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Saudi Arabia passes the oil output baton to Iran

Rashid Husain Syed is an energy analyst and consultant based in Riyadh and Toronto. For almost 25 years, he has served as vice-president of a leading Saudi trading and consulting house.

Riyadh has made a shrewd move. For being the bad boy of the energy world, for being adamantly unwilling to cut crude output, Saudi Arabia has passed the baton to Iran. In the process, Riyadh has not ceded much, reiterating Thursday that it was "not prepared" to cut production.

Now, the heat is on Iran. And with Venezuela taking the lead and Russia on board, too, it will not be easy for Tehran to disregard these two longtime allies on this issue for long.

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After this week's agreement in Doha to freeze oil production at January levels, energy ministers from Venezuela, Qatar and Iraq dashed to Tehran to ascertain Iran's position on the issue. After spending two hours with them, Iranian oil minister Bijan Zanganeh yielded that his country could support efforts to stabilize oil prices, including co-operation between Organization of the Petroleum Exporting Countries producers and non-OPEC oil producers.

Mr. Zanganeh emphasized that while he supported a production "ceiling" to stabilize oil prices, it should be the first of several steps taken. Sensing a positive hint in the statement, crude prices bounced slightly, with U.S. oil popping above $30 a barrel and Brent futures nearing $34.

Later, while talking to Iranian media, Mr. Zanganeh underlined that "we had a good meeting today and the report of yesterday's meeting was given to us. I was told that Russia, as the world's biggest oil producer, Oman and other countries are ready to join. This is a positive step, we have a positive approach to it and this is a good start."

And yet the initial Iranian reaction to the possible request to freeze output at current levels was not encouraging.

"Asking Iran to freeze its oil production level is illogical … when Iran was under sanctions, some countries raised their output and they caused the drop in oil prices," Tehran's OPEC envoy, Mehdi Asali, told the Shargh daily newspaper before Wednesday's talks.

Iran exported around 2.5 million barrels of crude per day before 2012, but sanctions cut that to around 1.1 million. Freed from sanctions, Iran ramped up its production to nearly three million barrels per day in January, an increase of 80,000 over December. Tehran has now pledged to raise supply by about one million barrels per day over the next six to 12 months.

The Venezuelan initiative to bring major stakeholders onto the same page seems to be forging ahead, slowly but surely. The deal to freeze production at January levels, which includes Qatar and Venezuela, is the "beginning of a process" that could require "other steps to stabilize and improve the market," Saudi oil minister Ali al-Naimi was quoted as saying in Doha.

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But this is just the first, small step in the desired direction. The agreement will only hold "if the other players also join in the regimen," the initial Doha agreement emphasized. In order to succeed and move ahead, Iran and others will have to sign on, too. But for Tehran to comply with and freeze output at January levels could be extremely difficult. Iran's case requires special handling.

Two non-Iranian sources close to the ongoing OPEC discussions told Reuters that Iran might be offered special terms as part of an output freeze deal. "Iran is returning to the market and needs to be given a special chance, but it also needs to make some calculations," said one source, without elaborating on what the special terms could entail.

The process has already crossed some political hurdles. With Saudi Arabia and Russia contesting fiercely on the Syrian front, many felt that any such move involving the two might be politically challenging. Yet signals emanating from Moscow have contradicted that notion. There is no link between Syria and oil production in Russia's dialogue with Saudi Arabia, Kremlin spokesman Dmitry Peskov said this week.

"They are two different matters," he told reporters. "… It is natural they have a dialogue about their own interests – both sides are naturally interested in such a dialogue. These are things that are not interdependent and not interlinked." He said Russia is interested in continued dialogue with other oil-producing nations to exchange views on the situation on the global oil market.

Brutal economic realities seem to be dictating terms – finally.

And in the meantime, oil production remains business as usual. The "freeze" at January levels allows major oil producers to continue pumping at record levels. Russia pumped a post-Soviet record high of 10.88 million barrels per day in January, while Saudi Arabia's output was near its record high – around 10.2 million barrels per day.

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So the arrangement maintains the status quo while the talks drag on, prolonging the pressure on U.S. shale and other struggling oil producers. But with the focus now on Iran, Saudi Arabia can finally heave a sigh of relief.

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