Wednesday, 17 February 2016

Iran says it is 'illogical' for it to join oil output freeze

The deal yesterday and the meeting today may mark the beginning of a fraught, protracted negotiation process within OPEC. Yet joint output cuts by both OPEC members and Russia remain a distant prospect.

The process is a smart strategy for Saudi Arabia. It shows that they are willing to collaborate and are not stubbornly sticking to their painful strategy of flooding the market to evict higher-cost producers. It shifts the burden of responsibility for refusing to cut production to arch-rival Iran. Finally, it maintains the status quo while talks are ongoing, thereby continuing to press US shale and other struggling oil producers outside of OPEC.

By stating that cutting output would be "illogical", Iran, for its part, has made its position clear ahead of the meeting, setting the bar high for negotiations. 

Even if a surprise agreement emerges, for instance by giving Iran a special status, it will do little to reduce the current imbalance in global oil markets. For Iraq, Russia and Saudi Arabia to "freeze" output at January levels means keeping pumping at record levels, at a time when demand is slowing in line with decelerating global economic growth.

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