Should Iran Be Held Equally Responsible for Oil Glut?

oil glutMovement in the oil market is usually a good predictor of economic across the globe, so when some of the biggest oil producers on the planet get together and agree to freeze their output—at January levels—in order to reign in what is soon to become a surplus—and prevent falling prices in the process—it definitely shakes things up. Of course, the way investors react to this is another thing entirely, and the market seems to indicate that this strategy will probably be ineffective.

The hope is that this new, combined, effort will help stem a 20-month decline in the price of oil, which has significantly slashed oil prices by as much as 70 percent thanks to a glut from the US reaching near-record production in shale oil output and a combination of OPEC and other global producers creating one of the biggest oil stockpiles in modern history.

Still, oil ministers from the top exporter Saudi Arabia (and Qatar and Venezuela) met with OPEC’s Russia agreed to stave off output, at a meeting in the capital of Qatar, Doha, on Tuesday. However this deal stipulates that other industry leaders must also participate, and this includes Iran, who is coming back to the market after years of sanctions that severely cut production—and profits.

“If Iran’s not part of the deal, it isn’t worth much,” explains Eugen Weinberg, who is the head of commodity markets strategy at Commerzbank AG, in Frankfurt. “After fighting to end sanctions for years and finally being free of them, why Iran would choose to put sanctions on themselves by freezing their production?”

Similarly, London’s BNP Paribas SA head of commodity markets strategy, Harry Tchilinguirian, concedes, “Any agreement will still be contingent on Iran being able to increase market share or increase production from current levels.”

On the other hand, Iran’s OPEC envoy, Mehdi Ahsali argues, “Asking Iran to freeze its oil production level is illogical.” He says that when the country was previously under sanctions, other countries had increased their output and it was this activity which caused dramatic drop in oil prices. Thus, he asks, “How can they expect Iran to cooperate now and pay the price?”

He also goes on to contend that the country will continue to increase production until, at least, it reaches pre-sanction levels. Ahsali reports that the country will stick to its pledge of increasing production up to, at least, one million barrels a day over the next 6 months to a year.