Saudi Arabia refuses to cut oil output as ‘no trust’, Iran says freeze is ‘ridiculous’

Saudi Arabia's oil minister Ali Al-Naimi speaks at the annual IHS CERAWeek global energy conference in Houston. Pat Sullivan / AP Photo

Saudi Arabia said it won’t cut oil production because it doesn’t trust other countries to join in, insisting instead that high-cost producers ought to bear the burden of reducing the current surplus.

“We are not banking on cuts because” there is “less than trust” that “countries are going to deliver even if they promise,” Saudi oil minister Ali Al-Naimi said in Houston Tuesday. The market will eventually rebalance because high-cost producers will have to “lower costs, borrow or liquidate” to cope with the slump in oil prices, Al-Naimi said, adding that he doesn’t know when the current price rout will end.

“It may sound harsh, and unfortunately it is, but it is the most efficient way to rebalance markets,” Al-Naimi told the IHS CERAWeek conference, an annual gathering of the North American oil industry. “Cutting low cost production to subsidise higher cost supplies only delays an inevitable reckoning.”

Al-Naimi reaffirmed the kingdom’s commitment to last week’s accord with Russia, Qatar and Venezuela to freeze oil production at January levels and said other producers could join the effort. The February 16 agreement reached in Doha will be implemented by major oil exporters, Al-Naimi said. The accord marks “the beginning of a process” that will continue with further discussions between producing countries in March, he said.

Oil prices sank as much as 5.3 per cent to $31.63 a barrel in New York after Al-Naimi spoke. Brent crude for April fell 33 cents, or 0.99 per cent, at $32.94 a barrel this morning.

Just minutes before Al-Naimi started speaking, Iran appeared to discard its initial cautious welcome of the Doha deal. It’s “ridiculous” for Saudi Arabia to propose that other nations freeze production when the kingdom has already increased output to more than 10 million barrels a day, oil minister Bijan Namdar Zanganeh said, according to his ministry’s news agency, Shana.

The call for a freeze puts “unrealistic demands” on Iran, which is planning to boost output by 1 million barrels a day this year after international sanctions were lifted, Zanganeh said.

The Doha deal marked the first sign of cooperation between Opec and non-members since oil prices began their long decline in 2014. Even as crude dropped about 70 per cent to 12-year lows, Saudi Arabia insisted that other producers would have to join in before it considered curbing production.

Previous failed attempts at coordination, such as when Russia offered to curtail supply in 2008 only to keep pumping, made analysts doubtful the latest pact will be successful. Divisions over the conflict in Syria - where Saudi Arabia and Russia back opposing sides - are also an obstacle.

The current global oil glut will persist into 2017, limiting any chance of a price rebound in the short term as the surplus takes even longer to clear than previously estimated, the International Energy Agency said in its medium-term market report Monday. The impact of the freeze will be limited because the four countries participating were already expected to have flat production, IEA executive director Fatih Birol said Monday in Houston.

While admitting that the kingdom’s policy that high-cost producers must adapt or collapse is harsh, Al-Naimi said that Saudi Arabia hasn’t “declared war on shale” or other producers.

“We’re not chasing a greater market share,” he said. “I welcome new, additional supplies, including shale oil.”

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